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Determining Whether the Chinese Services Industry Is Stagnant: An Empirical Test of Baumol’s Model

Received: 9 December 2018     Published: 11 December 2018
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Abstract

The effects of increasing employment share of services on the real GDP growth have been investigated by a series of theoretical and empirical analysis for developed countries. In contrast, there are few empirical test studies of such effects on macro economies for developing countries. Baumol predicts that the increasing employment share of services will lower real GDP growth and thus productivity growth in services. Based on the extended Baumol’s model of two-sector unbalanced growth, this study provides an empirical analysis of the causes of employment shift and the impact of rising share of services on the productivity growth in China. Though the GDP share and the employment share of services has been increasing secularly for decades in China, the growth rate of labor productivity in services is slightly higher than that in manufacturing. The results have not confirmed the Baumol’ hypothesis because of the low labor productivity in manufacturing and large number of rural labor. The external shocks of demand for services show weak effect on the employment growth in services and are not significant. Furtherly, the regression analysis shows that there is the potential possibility of "cost disease" in China. This study empirically tests the impact of the rising services on the overall economy and can help to develop appropriate industrial policies for developing countries.

Published in International Journal of Economics, Finance and Management Sciences (Volume 6, Issue 6)
DOI 10.11648/j.ijefm.20180606.16
Page(s) 283-289
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2018. Published by Science Publishing Group

Keywords

Service Economy, Baumol’s Model, Productivity Growth, Cost Disease

References
[1] Baumol, W. J., Bowen, W., 1965. On the performing arts: the anatomy of their economic problems. The American Economic Review, 55(2): 495-502.
[2] Baumol, W. J., 1967. Macroeconomics of unbalanced growth: the anatomy of urban crisis. The American Economic Review, 57 (3): 415–426.
[3] Baumol, W. J., Blackman, S. A. B. and Wolff, E. N., 1985. Unbalanced growth revisited: asymptotic stagnancy and new evidence. The American Economic Review, 75(4): 806-817.
[4] Hartwig, J., 2011. Can Baumol’s model of unbalanced growth contribute to explaining the secular rise in health care expenditure? an alternative test. Applied Economics, 43:173-184.
[5] Ramón P., Francisco G. V. 2017. Structural change and productivity growth in Mexico, 1990–2014. Structural Change and Economic Dynamics, 41:53-63.
[6] Baumol, W. J., Towse, R. (Eds.), 1997. Baumol’s Cost Disease: The Arts and Other Victims, Edward Elgar, Aldershot.
[7] Sasaki, H., 2012. Endogenous phase switch in Baumol’s service paradox model. Structural Change and Economic Dynamics, 23: 25-35.
[8] Albin, P., 1970. Poverty, Education, and Unbalanced Economic Growth. The Quarterly Journal of Economics, 84(1): 70-84.
[9] Echevarria, C., 1997. Changes in sectoral composition associated with economic growth. International Economic Review, 38: 431-452.
[10] Triplett, J. E. and Bosworth, B. P., 2003. Baumol's disease has been cured. Federal Reserve Bank of New York Economic Policy Review, 9: 23-33.
[11] Nordhaus, W. D., 2008. Baumol’s diseases: a macroeconomic perspective. The B. E. Journal of Macroeconomics, 8: 1-37.
[12] Haig, B., 1975. An analysis of changes in the distribution of employment between manufacturing and service industries, 1960-1970. The Review of Economics and Statistics, 57: 35-42.
[13] Spann, R., 1977. The macroeconomics of unbalanced growth and the expanding public sector. Journal of Public Economics, 8:397-404.
[14] Summers, R., 1985. Services in the international economy; Saxonhouse, G. Services in the Japanese economy; Leveson, I. Services in the U. S. economy. In Inman (eds.), Managing the Service Economy: Prospects and Problems. Cambridge University Press.
[15] Solow, R. M., 1987. We’d better watch out. New York Times Book Review.
[16] Sasaki, H., 2007. The rise of service employment and its impact on aggregate productivity growth. Structural Change and Economic Dynamics, 18 (4): 438–459.
[17] Griliches, Z., 1992. Output measurement in the service sectors, NBER Studies in Income and Wealth, vol. 56, University of Chicago Press.
[18] Pugno, M., 2006. The service paradox and endogenous economic growth. Structural Change and Economic Dynamics, 17 (1): 99–115.
[19] De Vincenti, C., 2007. Baumol’s disease, production externalities and productivity effects of intersectoral transfers. Metroeconomica, 58 (3): 396–412.
[20] Rafael F., Enrique P., 2018. Measuring the role of manufacturing in the productivity growth of the European economies (1993–2007). Structural Change and Economic Dynamics, 46: 1-12.
[21] Gao, C. S. and Li, S. T., 2007. The paradox on services economy in China and the strategic choice for China to promote service economy. Economic Survey, 4:15-20.
[22] Javier S., Frederick P., Jinhua Z., 2018. Worse than Baumol's disease: The implications of labor productivity, contracting out, and unionization on transit operation costs. Transport Policy, 61:10-16.
[23] Jing, X. Q., 2011. Study about regional difference of services industry in China. Economic Management, 6: 36-43.
[24] Cheng, D. Z., 2008. Is Chinese economy in the direction of tertiarization? Statistical Research, 25(9): 36-43.
[25] Fuchs, V., 1968. The Service Economy, National Bureau of Economic Research.
[26] Cheng, D. Z., 2010. Chinese services industries and economic growth. The Journal of World Economy, 10:25-42.
[27] Mikael, M., Eva C., 2017. Potential Consequences on the Economy of Low or No Growth - Short and Long Term Perspectives. Ecological Economics, 134:57-64.
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  • APA Style

    Zheng Dequan, Wang Enyan. (2018). Determining Whether the Chinese Services Industry Is Stagnant: An Empirical Test of Baumol’s Model. International Journal of Economics, Finance and Management Sciences, 6(6), 283-289. https://doi.org/10.11648/j.ijefm.20180606.16

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    Zheng Dequan; Wang Enyan. Determining Whether the Chinese Services Industry Is Stagnant: An Empirical Test of Baumol’s Model. Int. J. Econ. Finance Manag. Sci. 2018, 6(6), 283-289. doi: 10.11648/j.ijefm.20180606.16

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    AMA Style

    Zheng Dequan, Wang Enyan. Determining Whether the Chinese Services Industry Is Stagnant: An Empirical Test of Baumol’s Model. Int J Econ Finance Manag Sci. 2018;6(6):283-289. doi: 10.11648/j.ijefm.20180606.16

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  • @article{10.11648/j.ijefm.20180606.16,
      author = {Zheng Dequan and Wang Enyan},
      title = {Determining Whether the Chinese Services Industry Is Stagnant: An Empirical Test of Baumol’s Model},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {6},
      number = {6},
      pages = {283-289},
      doi = {10.11648/j.ijefm.20180606.16},
      url = {https://doi.org/10.11648/j.ijefm.20180606.16},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20180606.16},
      abstract = {The effects of increasing employment share of services on the real GDP growth have been investigated by a series of theoretical and empirical analysis for developed countries. In contrast, there are few empirical test studies of such effects on macro economies for developing countries. Baumol predicts that the increasing employment share of services will lower real GDP growth and thus productivity growth in services. Based on the extended Baumol’s model of two-sector unbalanced growth, this study provides an empirical analysis of the causes of employment shift and the impact of rising share of services on the productivity growth in China. Though the GDP share and the employment share of services has been increasing secularly for decades in China, the growth rate of labor productivity in services is slightly higher than that in manufacturing. The results have not confirmed the Baumol’ hypothesis because of the low labor productivity in manufacturing and large number of rural labor. The external shocks of demand for services show weak effect on the employment growth in services and are not significant. Furtherly, the regression analysis shows that there is the potential possibility of "cost disease" in China. This study empirically tests the impact of the rising services on the overall economy and can help to develop appropriate industrial policies for developing countries.},
     year = {2018}
    }
    

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    AU  - Zheng Dequan
    AU  - Wang Enyan
    Y1  - 2018/12/11
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    DO  - 10.11648/j.ijefm.20180606.16
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    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
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    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20180606.16
    AB  - The effects of increasing employment share of services on the real GDP growth have been investigated by a series of theoretical and empirical analysis for developed countries. In contrast, there are few empirical test studies of such effects on macro economies for developing countries. Baumol predicts that the increasing employment share of services will lower real GDP growth and thus productivity growth in services. Based on the extended Baumol’s model of two-sector unbalanced growth, this study provides an empirical analysis of the causes of employment shift and the impact of rising share of services on the productivity growth in China. Though the GDP share and the employment share of services has been increasing secularly for decades in China, the growth rate of labor productivity in services is slightly higher than that in manufacturing. The results have not confirmed the Baumol’ hypothesis because of the low labor productivity in manufacturing and large number of rural labor. The external shocks of demand for services show weak effect on the employment growth in services and are not significant. Furtherly, the regression analysis shows that there is the potential possibility of "cost disease" in China. This study empirically tests the impact of the rising services on the overall economy and can help to develop appropriate industrial policies for developing countries.
    VL  - 6
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Author Information
  • Department of Public Administration, Harbin Institute of Technology, Harbin, China

  • Department of Information Management and System, Harbin Institute of Technology (Weihai), Weihai, China

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