‘Baumol's Disease’, Production Externalities and Productivity Effects of Intersectoral Transfers

Abstract

This paper presents a model that introduces in an unbalanced growth framework à la Baumol the hypothesis of an endogenous productivity growth due to a positive externality of the service sector on manufacturing productivity and a learning-by-doing process inside both sectors. The model shows that a policy aimed at keeping the ratio between outputs in the two sectors constant in real terms may improve the aggregate productivity performance of the economy, depending on the parameters' values. Then the model derives the dynamics of the intersectoral transfer which is necessary to keep the ratio between outputs constant, and verifies that the amount of the transfer turns out to be always lower than the output of the manufacturing sector, and only asymptotically approaches it.

Endogenous phase switch in Baumol's service paradox model

“…De Vincenti (2007) reaches a conclusion similar to Pugno (2006). He assumes that both the growth rate of productivity in manufacturing and that in services are increasing functions of the employment share of services, and then, incorporates these specifications into Baumol's model.…”

Sources of Productivity Growth Dynamics: Is Japan Suffering From Baumol's Growth Disease?

“…8 Some of the possible indications of the high productivity growth rate of certain services sectors can be presented from representative empirical and theoretical studies that attempt to go beyond the simple model of Baumol (1967). From a theoretical perspective, first, this may be because of endogenous growth in that sector by way of human capital accumulation, innovation, and learning-by-doing (Pugno, 2006;De Vincenti, 2007). By way of a Japanese example, Morikawa (2014aMorikawa ( ,2016 shows that services firms have fewer product innovations than do manufacturing firms, while in Japan, firms in the services sector conducting innovation activities record much higher productivity than those not conducting them.…”

The Underdevelopment of Service Industry in China: An Empirical Study of Cities in Yangtze River Delta

“…So producer service has become the core competitiveness of developed countries. Even though labor productivity stagnates in some service industries and Baumol's hypothesis has been verified (Nordhaus, 2006), mechanism of learning by doing and transfer of technology and labor among different sectors have shaped up the trend that increase of overall labor productivity is driven by increasing labor productivity of producer service (Oulton, 2001;Vincenti, 2007). So some studies argue that the "Baumol cost disease" has been cured (Hartwig, 2006;Triplett and Bosworth, 2003).…”