Growth of the service sector is an important aspect of the economic development of post-industrial OECD economies, and it is strongly associated with income growth and economic modernization. While emphasis in the literature has been placed on final expenditure patterns and prices, some of the most striking aspects of service sector growth relate instead to the relationship of services to the production structure of economies, and particularly the relationship of the service sector to manufacturing. In Discussion Paper No. 1228, Research Fellow Joseph Francois and Kenneth Reinert explore the role of services in the structure of production and trade. Their main objective is to develop a set of empirically based stylized facts. The extent to which growth in intermediate services is simply related to splintering of otherwise unchanged activities, and the extent to which it represents a fundamental change in the organization of production, is also examined.

The authors use a cross-country sample of 17 social accounting matrices, studying upstream and downstream service linkages and their relationship to changes in income levels and the input-output structure of production. The following set of stylized facts emerges: income levels are positively associated with employment shares of intermediate services and with the share of indirect labour in total manufacturing employment; the share of value added originating in services is positively linked to the level of development; income levels show a strong link to intermediate demand for producer services; services have fundamentally changed the organization of production; and the importance of services for exports depends on the level of development.

The Role of Services in the Structure of Production and Trade: Stylized Facts from a Cross-country Analysis
Joseph F Francois and Kenneth A Reinert

Discussion Paper No. 1228, August 1995 (IT)