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, 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.
We thank the editor, four anonymous referees, Giuseppe Berlingieri, Paco Buera, Rui Castro, Pedro Cavalcanti Ferreira, Doug Gollin, Berthold Herrendorf, David Lagakos, Alessio Moro, Delfim Neto, Rachel Ngai, Markus Poschke, Todd Schoellman, Yoyee Wang, Xiaodong Zhu, and seminar participants at several institutions for useful comments and suggestions. All errors are our own. Both authors gratefully acknowledge the support from the Social Sciences and Humanities Research Council of Canada. Restuccia thanks the support from the Canada Research Chairs program. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Margarida Duarte & Diego Restuccia, 2020. "Relative Prices and Sectoral Productivity," Journal of the European Economic Association, vol 18(3), pages 1400-1443. citation courtesy of