Working Paper: NBER ID: w23979
Authors: Margarida Duarte; Diego Restuccia
Abstract: The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories. We document that many disaggregated service categories–such as transportation, communication, and finance–feature a negative income elasticity of relative prices, whereas the relative price of aggregate services is mostly driven by large expenditure categories in housing, collective government, and health that feature a positive income elasticity of relative prices. We also document a substantial reallocation of expenditures in services from categories with positive income elasticities (traditional services) to categories with negative elasticities (non-traditional services) as income rises. Using an otherwise standard multi-sector development accounting framework extended to include an input-output structure, we find that the cross-country income elasticity of sectoral productivity is large in non-traditional services (1.15), smaller in manufacturing (1.05) and much smaller in traditional services (0.67). Eliminating cross-country productivity differences in non-traditional services reduces aggregate income disparity by 58 percent, a 7.9-fold reduction in aggregate productivity differences. We also find that the heterogeneity between traditional and non-traditional services has a substantial impact on aggregate productivity and that the input-output structure is important in this assessment.
Keywords: Relative Prices; Sectoral Productivity; Economic Development; Income Elasticity; Service Sector
JEL Codes: O10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| eliminating productivity differences in nontraditional services (O49) | aggregate income disparity (F62) |
| heterogeneity between traditional and nontraditional services (L89) | aggregate productivity (E23) |
| input-output structure (C67) | assessment of productivity (O47) |
| income changes (D31) | sectoral productivity differences (O49) |
| relative price of services (P22) | income per capita (D31) |
| cross-country income elasticity of sectoral productivity (O47) | nontraditional services (L84) |
| cross-country income elasticity of sectoral productivity (O47) | manufacturing (L60) |
| cross-country income elasticity of sectoral productivity (O47) | traditional services (L84) |