Citizen Action Monitor

A shift towards the services sector of the economy heralds a considerably slower rate of economic growth

In fact, says Tim Jackson, “we may already be heading towards a stationary or quasi-stationary state” of growth.

No 2118 Posted by fw, December 9, 2017

To access all other synopses from Prosperity without Growth, click on the Tab titled “Prosperity without Growth” — Links to All Posts in the top left margin of the Home page.

Tim Jackson’s title for Section 6, Chapter 9 poses the question: “Do services provide a ‘new engine of growth’?

In arriving at an answer, Jackson takes the reader on a guided tour through the dazzling research findings of US economist, William Baumol.

For most of his career, Baumol studied service sector events. But his 2012 book, The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t, made a major contribution to measuring the value of economic activity.

A question resides in the book’s title: computers, being part of the product-based economy, get cheaper; whereas, health care, being part of the service-based economy, doesn’t get cheaper, it gets considerably costlier. Why is this?

The synopsis of Section 6 below tells all. To be truthful, it’s more than a synopsis. For that, my excuse is the rich and dense content of the text in this section.

Tim Jackson is a British ecological economist and professor of sustainable development at the University of Surrey.

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Do services provide a ‘new engine of growth’?, a synopsis, from Chapter 9, “Towards a Post-Growth Macroeconomics ” of Tim Jackson’s book, Prosperity without Growth, Routledge, 2nd edition, 2016-17

Jackson acknowledges the difficulty of trying to determine the growth potential of sustainable investment, as he attempted to do in yesterday’s synopsis of Section 5.

In contrast, he is confident he can bring “both a clear conceptual model and a good deal of empirical evidence to bear” on the question addressed in Section 6: “Do services provide a ‘new engine of growth’?”

According to the model and evidence, Jackson underscores the obvious – Compared to our current product-based economy, productivity growth in a service-based economy will be much slower because of the readily apparent futile, and even counterproductive, matter of trying to reduce the time to deliver services in this inherently labour-intensive sector of the economy.

To explain the implications of the fact-based evidence of slower productivity growth in the service-based sector of the economy, Jackson turns to the research findings of US economist, William Baumol.

For most of his career, Baumol studied service sector events. But his 2012 book, The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t, made a major contribution to measuring the value of economic activity.

Computers, being part of the product-based economy, get cheaper; whereas, health care, being part of the service-based economy, doesn’t get cheaper, it gets considerably costlier. Why is this?

Jackson cites the core proposition of Baumol’s research argument, which shines a light on the answer to the “Why is this?”

Here is Baumol’s explanation, broken into bulleted points.

First —

1a/ productivity growth varies across different sectors of the economy

1b/ costs in a less productive or ‘stagnant’ sector (e.g. service sector, like health care) tend to rise relative to costs in a more productive or ‘progressive’ sector (.e.g. product sector, like computers)

Second, this relative increase in costs occurs because:

2a/ wages across the economy tend to follow wages in the highest paid sector (e.g. the products sector)

2b/ and wages tend to rise with labour productivity (in the products sector)

2c/ since the progressive sector (the products sector) is the more productive sector

2d/ therefore, the progressive sector (the products sector) will set the wage level for the whole economy (including the services sector)

Third, higher wages in the progressive sector do not increase costs because:

3a/ labour productivity will also rise in the progressive sector (the products sector)

3b/ but in the stagnant sector (the service sector), since labour productivity cannot be increased, there is no way for firms in this service sector to offset wage rises set in progressive (e.g. products) sector; therefore, per 2d,  costs in the stagnant sector (the service sector) will also rise

Evidence from the US affirms Baumol’s hypotheses across 38 industries:

“… prices in service-based sectors have risen continually relative to those in the manufacturing and extractive sectors.

Fourth — There are some negative implications for “stagnant” sector service firms:

4a/ If the demand for service firms falls when their prices rise, demand will fall as prices rise. In a worst case scenario, failing firms will disappear. For example, in a throw-away product economy, repair services can’t compete if the parts and labour repair cost is about the same or higher than the repair cost.

4b/ Conversely, if the demand for a service doesn’t change much whatever the price, then the service will grow. The health care and education services are good examples: the price of both services keeps growing, and so too does the demand.

In either case, there are potential negative outcomes

Consider 4a/ — Useful services that contribute to human flourishing or have a low environmental impact may disappear – for instance, a neighbourhood bookstore that can’t compete with Amazon.

Consider 4b/ — An essential local, regional or national government service that is costly to provide, may face service reductions or be cut altogether – for instance, specialized medical services for small, remote Indigenous communities.

Baumol notes that “… the products most vulnerable to the cost [cuts] disease include some of the most vital attributes of civilized communities: health care, education, the arts…”

Under a steady or expanding service sector, we could be heading for zero growth, says Baumol:

“An economy which insists on maintaining (let alone expanding) its service sector is heading for zero growth. … An attempt to achieve balanced growth in a world of unbalanced productivity must lead to a declining rate of growth relative to the growth of the labour force.”

“The implications for economic growth are profound,” declares Jackson, speaking of the UK’s labour productivity decline. “In these circumstances, per capita growth is only possible by increasing the labour force or by having everyone work longer hours.”

Considering the implications of Baumol’s findings for the economy of tomorrow, Jackson concludes Section 5:   

“In short, the idea of a structural shift towards services makes a lot of sense. But the argument that it constitutes a new ‘engine of growth’ does not. For this reason alone, the chances are that the economy of tomorrow has a considerably slower rate of economic growth and may already be heading towards a stationary or quasi-stationary state.”

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