Relative Prices and Sectoral Productivity
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, health, and education 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 raises. 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 (1.14), smaller in manufacturing (1.06) and much smaller in traditional services (0.67). We also find that heterogeneity in services has a substantial impact on aggregate productivity and that the input-output structure is important in this assessment.
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Document Object Identifier (DOI): 10.3386/w23979