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The Growth of Service Industries

The Paradox of Exploding Costs and Persistent Demand

Edited by Thijs ten Raa and Ronald Schettkat

Problems arise if budgets for services are held constant whilst prices rise. Education, cultural activities and health services are under constant budgetary pressure. The authors argue that the price of commodities is linked to demand and price increases would therefore seem to threaten the very existence of these services. The paradox of these services is that in spite of their exploding costs, demand persists.
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Chapter 9: Income and price elasticities in different sectors of the economy: analysis of structural change for Germany, the UK and the USA

Joachim Möller


9. Income and price elasticities in different sectors of the economy: an analysis of structural change for Germany, the UK and the USA1 Joachim Möller 1 INTRODUCTION The restructuring process in developing and advanced economies has been a major topic in economics in the last three or four decades. In the centre of the analysis stands the rise and fall of the manufacturing sector with respect to the employment share and the predominance of the service sector in the most advanced economies. The phenomenon of the secular decline in the share of manufacturing employment is also at the heart of the European unemployment debate. For many observers, Europe’s persistent labour market problems are closely related to the inability to use the job potential of emerging markets for new services. Inflexibility, over-regulation and reluctance to accept more inequality are seen as major obstacles in this process. Contrary to popular perceptions, it turns out that many facets of the restructuring process are not well understood. Even 30 years after the famous contributions of Kuznets (1966) and Baumol (1967), which pioneered the theoretical analysis on this topic, some of the basic facts are still open to debate. For example, there is a recent theoretical and empirical dispute whether the share of manufacturing in real value-added is declining, stagnating or rising with per capita income (see Gundlach 1994, 1996; Quibrai and Harrigan 1996). Although the hypothesis of a productivity bias in favour of manufacturing (Baumol’s ‘cost disease of stagnant services’) is widely...

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