Labor costs and employment in the service economy

(1)

W ORKING

PAPERS

Mp

32 a

eoa

E U I W O R K I N G P A P E R No. 8 9 / 4 1 2

Labor Costs and Employment

in the Service Economy

GIANNA g i a n n e l u

G0STA ESPING- ANDERSEN

(2)

r

(3)

E U I W O R K I N G P A P E R No. 8 9 / 4 1 2

Labor Costs and Employment

in the Service Economy

GIANNA GIANNELLI G0STA ESPING-ANDERSEN © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute

(4)

No part of this paper may be reproduced in any form without permission of the authors

European University Institute Badia Fiesolana © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(5)

A st yl iz ed fact of c o nt em po ra ry labor ma r k e t s is the conc om it an t de c l i n e in employment in the traditional industrial se ct or s and the rise of se rv ic e employment. This p h e n o m e n o n has be en well do cu me nt ed in m a n y s t u d i e s . (1) The causes behind service em pl oy me nt g r ow th remain a di sputed issue amon g both soci ol og is ts and economists.

A co mp le te a n al ys is of the g r ow th of se rv ic e employ me nt w o u l d id eally require the i n v e s t ig at io n of the i n t e ra ct io n of d e ma nd and s u p p l y factors in service ma rkets, yet the ex isting l i te ra tu re has m a i n l y e m p h a s i z e d the d e ma nd side. The ca us al emph as is on income per ca pita in the "stages of growth" mode l p r es en te d in the early st udies in d e v e lo pm en t econ om ic s by Fi sher (1939) and Clark (1940), has remained in fl ue nt ia l in subsequent analyses. Thus, recent st ud ie s of the t e r t ia ry economy, even if a b an do ni ng the date d three- sector model, have focused on the s t ru ct ur e of pr iv at e c o n s um pt io n ( as an ex pr e s s i o n of final demand) as it influences p a rt ic ul ar kinds of service e m pl oy me nt g r o w t h . (2) In contrast, Ba um ol 's (1967; 1985) "u nb al an ce d growth" mode l e m ph as iz es p r e d o m i n a n t l y supply factors. In his model, p r o d u c t i v i t y grows unev en ly be tw ee n the ec onomic sectors. But, since labor costs in services are likely to g r o w at the pace of the mo re p r od uc ti ve ma nu fa ct ur in g, the result is a po te nt ia l cost disease. W i t h the li ke ly tr ansfer of labor from m a n u f a c t u r i n g to services, the "c os t- di se as e" implies that the m a c r o - e c o n o m y will bear an i n cr ea si ng cost for the p r o d u c t i o n of services. However, the cost di s e a s e p r o b l e m m a y al so imply slack d e m a n d for service labor; govern me nt may, of course, c o mp en sa te w i t h p u bl ic employment. Baumol's u n b a l a n c e d - g r o w t h mode l has had co n s i d e r a b l e i n fl ue nc e or.

(6)

recent research, p a r t i c u l a r l y on the behavior of the p u bl ic sector; but it has al so been subject to c r i t i c i s m . (3)

This st ud y is not mean t to ad dr es s d i re ct ly the Baumol model. Our ob je ct iv e is to trace the impact of su pp ly factors on labor demand. To this end, we an al yz e the direct rela ti on sh ip b e tw ee n the cost of labor a n d e m pl oy me nt in diverse se rvice industries. In co ntrast to most ex isting studies, we a s su me that the t e r t ia ry sector is h i gh ly d i ff er en ti at ed in terms of reactions to both s u pp ly and demand factors. It is, moreover, a s su me d that the se rvice sectors are c o m p os ed of firms that, in fo rming their own demand for l a b o r , have to face bo th the su pp ly and de ma nd conditions of the economy. In services, of course, the cost of labor a c c o u n t s for the lion's share of total p r od uc ti on c o s t s .

The relation b e tw ee n the cost of labor a n d e m pl oy me nt is one of the leading subj ec ts in the fiel d of labor economics but has, surprisingly, never been i n v e st ig at ed for services. Give n their he terogeneity, any a n a l y s i s is m e a n i n g f u l on ly if c o nd uc te d at such a level of d i s a g g r e g a t i o n that behavioral v a r i a t i o n s can be identified. For example, given demand, it is to be e x p e ct ed that labor costs will be mu ch more in fl ue nt ia l in the g r ow th of cons um er services than in health services.

This st ud y is d o ub ly comparative. It co mpares across different types of service industries, and al so ac ro ss three countries (Germany, Sweden, and the U n i t e d States) known to exhibit very di ff e r e n t e m pl oy me nt prof il es over the past two decades. In terms of service industries, we have identified three ge n e r a l groups, each e x p e c t e d to be have u n i q u e l y in terms of the e m pl oy me nt impact of labor costs: consumer-,

(7)

bu si ne ss - and so ci al - (public and private) services. It is w i de ly re co gn iz ed that in Europe the g r ow th of tert ia ry em pl oy me nt has b e e n sl uggish c o m p a r e d to the U n it ed States and Scandinavia. G e r m a n y stands as a typical ex ample of slow ov erall se rv ic e growth. In Sweden, se rv ic e em pl oy me nt g r ow th has be en ve ry strong, but al mo st e n t i r e l y co n c e n t r a t e d in public sector so cial and h e al th services. The U n it ed States is u n iq ue in the sense that e m p l o y m e n t has grown t r e m en do us ly in consumer, business, a n d so ci a l / h e a l t h services, the latter however, pr ed o m i n a n t l y in the pr ivate s e c t o r .

This paper ad dr e s s e s an issue which, in recent years, has prov ok ed c o n s i d e r a b l e cont ro ve rs y in E u r o p e a n debates. Wh i l e some argu e that E u r o p e a n employment has be en stagnant due to tight d e m a n d p o l i c i e s (Blanchard, D o r n b u s c h and Layard, 1986), others, such as G i er sc h (1983) and Br u n o and Sachs (1985), su gg es t that Eu rope's poor e m pl oy me nt p e r f o r m a n c e is prim ar il y a fu nc ti on of too rigid (and high) labor cost s and compre ss ed wa ge differ en ti al s. It is us ua ll y assumed, either ex pl ic it ly or implicitly, that if Eu ro pe we re to f o ll ow the A m er ic an pa t t e r n of wage setting, a m u c h m o r e d y na mi c labor market wo ul d e n s u e . (4)

The mo de l to be tested in this pape r ad dr e s s e s this debate. The m a i n a r g u m e n t is that the i n fl ue nc e of labor costs on e m pl oy me nt gr ow th is far from bein g u n i f o r m across the service economy; indeed, we be lieve it to be re st ri ct ed to only ce rt ai n sections of the se rvice economy, the consumer se rvices in particular. In other words, our ex pe ct at io n is that the cost of labor is a sign if ic an t variable in d e t e r m i n i n g employment m a i n l y in the sectors that rely on unskilled, an d less un io n i s e d labor supply. Hence, this se ct o r - s p e c i f i c rela ti on sh ip s h ou ld be stronger

(8)

in countries, like the U n it ed States, where wage bargaining is de -c en tr al iz ed and trade u n i o n i s m weak.

1. Employment and Labor Costs in Services.

The data sources for our c o m p ar is on s of Germany, Sweden, an d the U n it ed States are the nati on al accounts statistics. Th es e pr ov id e a c o mp ar ab le d i s a g g r e g a t i o n for the Un it ed States and Sweden, wh e r e a s less detail is a v ai la bl e for Ge rm an y (see table 1, and A p p e n d i x 2). The ti me -s am pl e di ffers across the countries: for the Un it ed States, 1948- 1986; for S w e d e n , 1963-1986; a n d for Germany, 1970-1986. Due to these di ff er en ce s in data availability, the stud y will first co nduct a series of si ng le co untry analyses, and then a co mp ar at iv e an al ys is of the three co un tr ie s for 1970-1986.

As is usual in the na tional accounts, the data refer to pr ivate sector industries; p u b l i c service sector a c t i vi ty is, unfortunately, lumped together with the class called "Government". Thus, this sector includes not on ly em pl oy me nt in public education, health, and social services, but also other g o ve rn me nt a c ti vi ti es ranging from po li ce to sa ni t a t i o n w o r k e r s . (5)

The em pl oy me nt data is the number of full-time eq ui va le nt em pl oy ee s (see the A p pe nd ix 1); this choice was d i c t at ed by the gr ow in g we ig ht in se rvice employment of pa rt - t i m e workers, e s pe ci al ly in Sweden. The cost of labor is de ri ve d by d e fl at in g the se ctoral co mp en s a t i o n per em pl oy ee by the sectoral value ad de d deflator. The diff er en ce s in the ch ar a c t e r i s t i c s of the pa tt er ns of employ me nt and co st -o f- labor gr ow th of the three co un tr ie s consid er ed appear in Ta b l e 1. © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(9)

From Ta b l e 1, it is first of all clear that A m e r ic an service e m p l o y m e n t gr ow th has been mu ch mo re p e rv as iv e than in either S w ed en or Germany. The U n it ed St at es al so stands out by the fact that this has, unti l recently, been a c c o mp an ie d by a continuous, albeit slower, g r o w t h in ma nu f a c t u r i n g employment. Bo th Sweden and Ge r m a n y c o n f o r m to the typical E u r o pe an p a tt er n with a p r o n o u n c e d d e cl in e in m a n u f a c t u r i n g employment. Afte r 1970, the A m e r i c a n rate of ma nu f a c t u r i n g employ me nt gr ow th turns negative, but the decline is 1/4 of that of S w ed en and Germany. The real cost of labor in m a n u f a c t u r i n g has been i n cr ea si ng by a r o u n d 3 per cent a n n u a l l y in all sample pe riods a n d countries; since the ea r l y 1970s, Ge r m a n y has r e gi st er ed the hi ghest rate of i n c r e a s e .

E m pl oy me nt in consumer services (sectors 7-11 and, for the U n it ed States, also sector 3 in table 1) has grow n very rapidly in the U n it ed States (since 1970, ar ou nd 3 per cent annually), rather slowly in Germany, a n d has been largely stagnant in Sweden (where pers on al se rv ic es and a u to re pa ir ac tually decline). Co mp ar at iv el y, the real cost of labor has risen sl owest in the Un it ed States; in some sectors (hotels and p e r s o n a l services) it has been ne ga ti ve since 1970.

B u s i ne ss se rvice em pl oy me nt (sectors 4-6) has b e e n the most d y na mi c g r o w t h sector of all in the U n it ed States. In the othe r two countries, its gr ow th has b e e n slower, but still significant. The real cost of labor has been decrea si ng in the busi ne ss services pr op er in the U n it ed States, and in finance in Sweden. This m a y seem counteri nt ui ti ve , since the higher sk il l- l e v e l s — c o m p a r e d to, for example, consumer serv ic es — sh ou ld be a s s o c i a t e d with a d o w n w a r d ri gidity of wages. It is to be noted, however, that we are cons id er in g here the real cost of

(10)

labor, that is labor costs d e fl at ed by the pric e of the se rvice produced. It is ther ef or e re as on ab le to attribute the de cl in e in the real cost of labor in some consumer se rvice sectors to a d o w n w a r d fl ex ib il it y of wages, and the de cl in e in bu siness serv ic es to an increase in the pric e of the service.

Employ me nt in social se rv ic es (sectors 12-15) m u s t be di vi de d into pr iv at e (sector 12-14) a n d pu bl ic (sector 15). In the U n it ed States, we ob se rv e high rates of g r ow th in p r iv at e e d uc at io n and h e al th (around 3 and 5.5 percent, respectively) and a st agnant p u bl ic sector. Sweden, instead, has the hi gh es t rate of g r ow th in p u bl ic employ me nt (nearly 4 per cent a year fr om 1963). Private e d uc at io n and health m a y al so be gr ow in g fast in Sweden, but their share in service em pl oy me nt is miniscule. In Germany, pr iv at e health has grow n remarkably, and pu bl ic em pl oy me nt falls between the other two countries. The real cost of labor grows relatively slowly in all co un tr ie s and, in some cases, it declines. A n in te re st in g case is Sw ed en , where the real labor cost de cl in es over all s a mp le periods. Since the v a l u e- ad de d de flator in this sector is a good wage deflator, this tend en cy must be a t tr ib ut ed to the de cl in e of real w a g e s .

2. The E c o n om et ri c Analysis.

Our ob je c t i v e is to esti ma te a mo d e l for the service sectors that a l lo ws us to co mp ar e the co ef fi c i e n t s of sectors and countries. To this pu rp os e we set up a pooled model with du mm y v a ri ab le s that al lo w for -he intercept term to vary over time and c r o s s - se ct io n unit s (the sectors). Our dependent v a r i ab le is employment in se rv ic es and our expl an at or y va ri a b l e s are the cost of labor (our supply

(11)

variable) a n d GDP per capita (our d e ma nd variable). We also al lo w the se ct or -s pe ci fi c cost of labor to have a variable co ef fi ci en t over sectors, as well as the c o e f fi ci en t of the econ om y- wi de d e m a n d variable. The a n al ys is is co nd u c t e d by po ol in g the time series an d sectoral data. A l l the variables are in log-terms.

We have a l s o e s ti ma te d the mode l for the m a n u f a ct ur in g sector. The n e g a ti ve and si gn if ic an t r e l a t i o n be tw ee n the cost of labor and e m pl oy me nt in m a n u f a c t u r i n g has b e co me an e s t a bi li sh ed fact in the empirical l i te ra tu re on the subject. H a v i n g included ma nu f a c t u r i n g in our analysis, we can test the v a l i d i t y of our model to r e pl ic at e this robust result and e x am in e the d i f f er en ce s of its cost of labor- employment re lation as co mp ar ed to services.

The s p e c i f i c a t i o n of the eq uation is the following: E. .= |i + y-+ X.+ 0C.CL..+ 8-Y..+ e.,.

it ‘i t i it l t it w h e r e :

E : e m pl oy me nt CL: cost of labor Y : income per capita

i : g r o u p index, w i t h i = 1, ...,G t : time index, wi th t = 1,...,T

p : m e a n intercept constant over gr oups

Y^: d e v i a t i o n from intercept term that v a ri es over groups

X t : d e v i a t i o n from intercept term that v a ri es over ou: sl op e c o e f fi ci en t that va ri es ever groups

slop e c o e f fi ci en t that v a r i e s ever groups time © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(12)

e ^ : di st u r b a n c e term

No te that the intercept te rm for each ob se r v a t i o n is:

In this p o ol ed mode l the number of o b se rv at io ns is G*T and the number of p a ra me te rs to be e s ti ma te d is T+3G+1. The te xtbook v e rs io n of this mode l as su me s fixed sl op es (see Judge et al., 1985). We have assumed, instead gr ou p - v a r y i n g p a ra me te rs and that am ou nt s to running s e p a r a t e OLS regressions. The re as on we have ad op te d this p o o l e d mo de l is that we can, in this way, me a s u r e how mu ch of the di ff er en ce wi th the ge neral m e a n intercept is due to pa rt ic ul ar c h a r a c te ri st ic s of the sector co ns i d e r e d and h o w m u c h of this d i f f e r e n c e is due to the general m a c r o e c o n o m i c condit io ns of the year considered.

We as su me a n d to be fixed parame te rs a n d es timate the mode l by mean s of du mm y variables. (6) The use of dummy vari ab le s al lo ws to ex p l a i n a subs ta nt ia l p o rt io n of error v a ri at io n wi thout ob ta i n i n g any pr ec is e k n ow le dg e of the model. As usua l wi th du m m y variables, there is a trade-off between loosing de gr ee s of fr ee do m and r e du ci ng the pr ob a b i l i t y of e s t i m a t i n g bi ased c o e f fi ci en ts b e ca us e of misspecification.

We define the f o ll ow in g dumm y variables: s.

1 = 1 for sector i = 0 o t he rw is e p t = 1 for time t

= 0 o t h e r w i s e .

The eq ua ti on to be e s ti ma te d will ther ef or e be the f o l l o w i n g : © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(13)

E it= m + vG-1

Li=l 9i S I + V t + S i = i a is iC L i t + Ii =ib is i*t + e it

where _{s i=}* _{S i~ SG} for i = l , 2 ,. .., G - 1 , and P fc= P fc- P T for* t=l,..,. ,T-1 and the restrictions £ = 0 and £ X fc = 0 have been imposed. The p a ra me te rs to be es ti m a t e d are m that is the av erage intercept, g^ wh ic h m e as ur es the d i ff er en ce from m of em pl o y m e n t in sector i, l t w h i c h m e a s u r e s the differ en ce fr om m for the pe riod t, a. and b. that are the

r l l

slope co ef fi c i e n t s for the cost of labor and income per capita respectively. The number of p a ra me te rs to be estimated is t h er ef or e T+3G-1. The e s t i m a t e d g r o u p a n d time coef fi ci en ts for the G thgroup and T tho b s e r v a t i o n are

" I a n d lfc respectively.

The e s t i m a t i o n tech ni qu e consists of the f o ll ow in g steps: 1) We first e s ti ma te the po ol ed mo d e l by m e a n s of in st ru me nt al v a ri ab le s since the cost of labor a n d income per capita are en do ge no us to the system. In or d e r to ov er co me the p r o b l e m s co nn ec te d w i t h the p r e s e n c e of h e t e r o s k e d a s t i c i t y , we have chosen the pr o c e d u r e by Whit e

(1982), whic h c o m p ut es s t a n da rd errors that are c o ns is te nt even in the p r e s e n c e of un kn ow n h e t e r o s k ed as ti ci ty.

2) H a v i n g o b t a i n e d consis te nt para me te rs , we test the residuals for first-order a u to co rr el at io n. We a l l o w the a u t o c o r r e l a t i o n co ef fi ci en t to vary over groups.

3) We e s t i ma te the p o ol ed mode l on the t r a n s f o r m e d var i a b l e s . © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(14)

We then pr oceed to test for the joint s i g n if ic an ce of gr o u p and time dummies by m e a n s of F-tests. The test on gr o u p du mm ie s allows us to e s t a b l i s h if there are other si gn if ic an t causes above the cost of labor and income per ca pi ta that induce a di ff er en t be ha vi or of e m pl oy me nt in each sector. These causes, however, remain unspecified. The test on time du mmies allows us to a s c e r t a i n if the general m a c r o - e c o n o m i c condit io ns of each year have a f fe ct ed the beha vi or of service employment.

In order to test our h y p o t h e s i s that the three gr ou ps of serv ic es (consumer-, business-, social-) sh ow a di ff er en t b e ha vi or al relation be tw ee n e m pl oy me nt and the cost of labor, we have tested for the e q u a l i t y of co ef fi c i e n t s of the se ctors that form each group. Again, this is done by mean s of F-tests.

3. Si ng le Co un tr y Analyses.

We have esti ma te d the mode l for the United States from 1948 to 1986, for Sweden from 1963 to 1986 and for G e rm an y from 1970 to 1986. Table 1 shows the sectors c o n s i d e r e d in our an al ys is and the a g g r e g a t i o n crit er ia ad op te d to test for the vali di ty of the e q ua li ty of the cost of labor c o ef fi ci en ts in our three m a c r o - s e c t o r s of services. Ta bl e 2 su mm ar iz es the results.

The Un it ed States

We first note that the co st -o f- la bo r c o e f fi ci en t is negative and si gn ificant in e x pl ai ni ng e m pl oy me nt in ma nu f a c t u r i n g in the Un it ed States. This coef fi ci en t has the highest ab solute value of all si gn ificant co st - o f - l a b o r c o e f f i c i e n t s . © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(15)

The retail trade sector in the U n i t e d States includes employment in "Eating and Dr inking Places" wh ic h is one of the sectors wh e r e employment has grow n v e r y ra pi dl y during the 1 9 8 0 ' s . (7) In our classi fi ca ti on of services, ea ti ng and drinking p l ac es fall in the ca tegory of c o n s um er services. This sector shows a high and si gn ificant e l as ti ci ty of employ me nt wi th respect to the cost of labor, th ough lower than in m a n u fa ct ur in g. The same thing is v a l i d for nearly all sectors that we have gr ou pe d as cons um er services.

Em pl oy me nt in busi ne ss services, instead, is not expl ai ne d by the cost of labor, and in s o ci al se rvices it has a p o s i t i v e co ef fi ci en t. The co ef fi c i e n t s of income per capita a r e all p o s i t i v e and hi gh ly si gn i f i c a n t ex ce pt for personal services.

The F- te st on the gr o u p and time d u mm ie s (see table 3) shows that we can accept the h y po th es is that em pl oy me nt varies ac co r d i n g to se ctoral (unspecified) ch ar ac te ri st ic s, and that em pl oy me nt in services has be en i n fl ue nc ed by overall m a c r o e c o n o m i c co nd it io ns c o mm on to all sectors. The F-test for po oling of cost of labor c o e f f i c i e n t s shows that there is a c o mm on b e ha vi or al pa tt er n a m o n g the individual sub-groups that combine, respectively, into the three sectors (business-, consumer-, and so c i a l - services). In other words, these three ma cr o - s e c t o r s are g e n e r a l l y ca pa bl e of su mm ar iz in g the more deta il ed labor cost - e m pl oy me nt growth relationships.

These results c o n f i r m our e x pe ct at io ns a b o u t the behavior of employ me nt in the se rvice sectors of the U n i t e d States. The sectors c h a r a c t e r i z e d by less s k il le d labor (i.e. consumer services) are the most sens it iv e to labor costs. Hence, the s t a b i l i t y of real labor co s t s in this sector

(16)

ex plains why em pl oy er s have ch osen to au gm en t their labor force. The results indicate that we can not ignore the role of demand, wh i c h is sign if ic an t for all sectors with the one p u z z li ng e x ce pt io n of the p e rs on al services.

In the U n it ed States, the en or mo us g r o w t h in bu siness service e m pl oy me nt is cl ea rl y not re lated to the cost of l a b o r . (8) And, for the social services, we find that there is in effect a p o s i ti ve co rr e l a t i o n be tw ee n em pl oy me nt and labor costs. In this case, it ma y not be that labor costs are enti re ly irrelevant (when we turn to Sweden, we will in fact di scover its relevance). While, it runs counter to pr ev ai li ng theory, this p o s i ti ve c o r r e l a t i o n mi gh t be expl ai ne d in two d i ff er en t ways: one, the pa rt ic ul ar skills de ma nd ed in social, educ at io na l and h e al th services subverts the clas si ca l rela ti on be tw ee n p r ic es and quantities; two, many of the p r o f e s s i o n s (like doctors) en gaged in these kinds of services may fit closer to an o l i g o p ol is ti c mo de l of labor supply.

Hence, for the U n it ed States, co ns um er se rvices are the only on es wh i c h f o l l o w the c l as si ca l labor d e ma nd curve. But, note that the e n o r mo us gr owth in bu si ne ss and social services is, in our model, best a t t r i b u t e d to income per capita (i.e. demand), a n d the du mm y variables. The ef fe ct of the gr o u p du mm ie s indicates that there are other se ctor- specific ch ar a c t e r i s t i c s that re ma in u n s p e c i f i e d in our analysis. To the d e g r e e that the time du mm ie s ca pture overall m a c r o - e c o n o m i c conditions, the effect was ne gative during the 1950s, ne utral d u ri ng the 1950s, a n d p o si ti ve during the 1970s and 1980s.

Finally, w i t h i n the A m e r i c a n m a n u f a c t u r i n g sector, the results in dicate that em pl oy me nt has be en m o r e labor cost

(17)

elastic than in services. This was to be e x p e c t e d since ma nu fa ct ur in g real labor costs ha ve gr ow n faster than elsewhere, a n d sinc e this sector is mo st l i ke ly to respond with capital deepening. In fact, the c a p i t a l / l a b o r ra ti o in services has be en constant since 1975, whil e it has ri se n in ma nu fa ct ur in g (OECD, 1987).

Sweden

A negative, albeit less powerful, r e l a ti on be tw ee n employment and the cost of labor ob ta in s a l s o for Sw ed is h manufacturing. The cost of labor has a s i g n i f i c a n t ne ga ti ve effect in three out of five consumer s e r v ic es and, un li ke the Un it ed States, al so in pr ivate so ci al s e r v ic es a n d in government. The F-test for pooling of cost of labor coefficients shows that our g r o u p i n g into consumer-, business- and social services is a p p r o p r i a t e for Sw ed en as w e l l .

These re sults indicate that Sw ed is h p r i v a t e sector employers b e h a v e ac co r d i n g to the labor d e m a n d curve. Manufa ct ur in g has been lo si ng jobs in t a n d e m w i t h real labor cost growth; in cons um er services, labor costs a l s o rose strongly, and this sugg es ts why, in Sweden, e m p l o y m e n t in consumer se rv ic es has re ma in ed stagnant.

The results for the p u bl ic sector are qu it e interesting. The c o nt ai ne d but steady de cr ea se in the level of the real labor cost reflects the increase in consumer pr i c e i n fl at io n in the 1970s, a n d the o n l y pa rtial response of w a g e s to de ve lo pm en ts in the op en sector. C o n t r a d i c t i n g the well - known Sc a n d i n a v i a n (Aukrust) model, p u bl ic s e ct or wa ge s have lagged b e hi nd the p r iv at e sector, e s p e c i a l l y in re cent years (OECD, 1989: p.68). This p h en om en on mu st be u n d e r s t o o d in © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(18)

light of the strong p o li ti ca l commit me nt to av o i d high unemployment. If Sweden's m a ss iv e p u bl ic sector employment expansion during the 1 9 7 0 's and 1 9 8 0 's had been ac co m p a n i e d by exce ss iv e wage increases, pu bl ic ex pe nd it ur e g r ow th would have reached intolerable levels. The highly si gn if ic an t negative re la ti on be tween the real cost of labor and employment, is, therefore, the ob vi ou s outcome of a full- employment po licy a n c h or ed in g o ve rn me nt employment growth.

It would, at first, appear c o n t r a d i c t o r y that em pl oy me nt in consumer services is n e g a t i v e l y co rr el at ed w i t h income per capita. A g gr eg at e e m pl oy me nt studies for other countries show invariably a p o s i ti ve relation b e tw ee n the two variables. But, here we must consider the peculiar properties of the Sw ed is h economy. We have seen that employment in the Sw ed is h consumer services {especially personal services) has been de cl i n i n g over the p e ri od considered. F r o m the mid-1970s, a l mo st all net additi on al jobs were cr ea te d by the p u b l i c sector. Thus, even if income per capita has been rising c o ns ta nt ly (albeit at a lower rate than the O E C D average), the gr ow th -d iv id en d has been largely taxed aw ay to finance g o ve rn me nt employment. As a consequence, the real g r o w t h of p r iv at e cons um pt io n has been lower than in other countries, le ad in g implicitly to a cr ow di ng -o ut effect in the pr iv at e sector. Un d e r such circumstances, it is ev ident why the g r o w t h of income is ac co mp an ie d by a decline in co nsumer services.

Finally, the F-test for po ol in g rejects the h y po th es is of a common intercept for all groups. The time dummies, instead, a r e not jointly significant. This means that ma cr o- economic co nd it io ns have net i n fl ue nc ed neither the overall trend, nor any ti me - s p e c i f i c s t ru ct ur al changes. Hence, to

(19)

explain service e m pl oy me nt in Sweden we mu st take into account the s p e c if ic c h ar ac te ri st ic s of each sector.

Germany

Since the G e r m a n national ac co un ts p r o v i d e on ly short time series and a poor di sa gg re ga ti on , our results are b o u n d to be less i n f o rm at iv e as c o mp ar ed to those of the other two countries. We note first that the c o e f f i c i e n t for the cost of labor is n e ga ti ve and s i g n if ic an t in e x pl ai ni ng m a n u f a ct ur in g employment. It is s i m i l a r l y n e g a t i v e for wholesale, retail, finance, g o ve rn me nt a n d "other" services. Income per c a p i t a is a si gn ificant e x p l a n a t o r y va ri ab le for all sectors, ex ce pt m a n u f a c t u r i n g a n d insurance. The F-test for po ol in g re jected the h y po th es is of a co mm on grou p intercept, but a c ce pt ed the hy po th es is of co mm on time i n t e r c e p t .

During the 1980s, it has often be en a r g u e d that real labor costs in G e r m a n y have be en too h i g h to secure full employment (Giersch, 1983). This argu me nt has at least two implications. First, it implies the e x i s t e n c e of the labor demand curve. Second, it co nf in es the i n fl ue nc e of a g gr eg at e demand factors to a m a r g in al role. The first i m p l ic at io n is confirmed by our results, since there is a nega ti ve e m pl oy me nt -l ab or cost re la ti o n s h i p in six out of the ten sectors considered. But its v a li di ty seems mo re du b i o u s for the service se ct or s such as finance, and the clas s ca ll ed "others" (which includes p e rs on al and b u si ne ss services).

The se cond implication, however, is p a r t l y c o n t r a d i c t e d by our results. Se rvice employ me nt is p o s i t i v e l y and si gn if ic an tl y re la te d to income per capita, wh i c h can be consid er ed a p r o x y for ag g r e g a t e d e m a n d factors. These

(20)

results are therefore co ns is te nt w i t h those studies that e m ph as iz e the import an ce of ag gr e g a t e demand in explai ni ng the p a t t e r n of G e r m a n em pl oy me nt (Franz and Konig 1986; Blanchard, D o rn bu sh and Layard, 1986). A c co rd in g to these studies, the rise in G e r m a n u n e m p l o y m e n t after the first oi l- p r i c e shock is p r i m a r i l y the result of a sustained p e ri od of mo dest GNP growth. Our findings, however, suggest that the sectoral response to GNP g r o w t h varies. Ther e is a sign if ic an t and p o s i ti ve effect of GNP per capita on service em pl oy me nt growth, but not for ma nu fa ct ur in g. Accordingly, we can impute the c o m p a r a t i v e l y slower g r ow th of Ge rman service em pl oy me nt to the st ag na nt g r o w t h of demand.

4. Some C o m p ar at iv e Ob se rvations.

In order to co mpare the results across our three countries, we have esti ma te d the mode l st arting fr om 1970 for S w ed en a n d the U n it ed St at es (see table 4). G i v e n the high number of regressors and fewer de grees of freedom, these estimates are of co ur se less robust than those ob ta in ed with longer time series. W i t h this in mind, our results no ne th el es s suggest some i n t e re st in g comp ar at iv e obse rv at io ns on the em pl oy m e n t - l a b o r costs relation, es pe ci al ly co nc e r n i n g m a n u f a c t u r i n g and services.

The Un it ed St at es ex hibits the hi gh es t coef fi ci en t for the cost of m a n u f a c t u r i n g labor. And, for the service industriess, the U n it ed States shows the highest number of si gn ificant n e ga ti ve relations; the ne gative relations are es pe ci al ly st ro ng in the co nsumer services. The F- tests reject the h y p o t h e s i s of equa l co ef fi c i e n t s w i t h i n the groups of consumer, bu siness and social services in all countries. The r e je ct io n of this h y p o t h e s i s for the p e ri od after 1970 su gg es ts that the se rv ic e se ctors a r e b e co mi ng

(21)

mo re h e t e r o g e n e o u s as far as the re la ti on of e m pl oy me nt to labor cost s is concerned.

These results, then, in dicate that we m u s t q u a l i f y the argument that the A m e r i c a n econ om y' s a b i l i t y to cr ea te a large number of jobs is d u e to its c o m p a r a t i v e l y greater wage f l e x ib il it y — an ar gu me nt implying that the d e m a n d for labor is cost-e la st ic . If the ar gu me nt had b e e n correct, we sh ou ld have o b s e r v e d a c o m p a r a t i v e l y lower e l a s t i c i t y for U.S. ma nu fa ct ur in g. But, in reality, the e l a s t i c i t y for ma nu f a c t u r i n g in the U n i t e d States is h i gh er than in the other two countries. Additi on al ly , we note a hi gh e l as ti ci ty for the c o n s um er se rv ic e se ctors in the U n i t e d States, where the real cost of labor ty pi c a l l y decreased, a n d where employment gr ew enormously.

Our e s ti ma te s in dicate that the "wage flex ib il it y" ar gument hold s only for the co ns um er se rv ic e sectors. For ma nu fa ct ur in g, the wage f l e x ib il it y a r g u m e n t is inappropriate. Gi v e n that the e l as ti ci ty is h i gh es t for A m er ic an m a n u f a c t u r i n g (where e m pl oy me nt d e c l i n e has been the least), it is m o s t p r o b ab le that the e m pl oy me nt be havior in m a n u f a c t u r i n g is ca us ed by d e m a n d and s e c t o r - s p e c i f i c causes (such as t e c h n o lo gi ca l innovation) rather than by greater wa ge flexibility. Co nv er se ly , the lower e l a s t i c i t y for Sw ed is h and G e r m a n m a n u f a c t u r i n g indi ca te s that the cost of labor is not the m a i n reason b e hi nd e m p l o y m e n t decline. 5. C o n c lu si on s

This stud y has e x p l o r e d the re lative i m po rt an ce of labor costs a n d d e m a n d for the c r e a ti on of e m p l o y m e n t in se rvice sectors. The study co nfirms the cr uc ia l i m p o r t a n c e of d i s a g g r e g a t e d an al ys is for an u n d e r s t a n d i n g of co n t e m p o r a r y © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(22)

trends and shifts in the employment structure, p a r t i c u l a r l y in the se rv ic e economy.

The stud y suggests that we must re assess the relevance of de ma nd factors, but it al so co nf ir ms that the real cost of labor is a cr ucial de te r m i n a n t of se r v i c e employment. Of p a rt ic ul ar interest ar e the results of the country comparisons. The c o m p ar at iv e an alyses ha ve s e ns it iz ed us to the fact that the re la ti o n s h i p b e tw ee n employ me nt and the cost of labor is far from being g l o b a l l y similar. Each co un tr y ex hibits a b e ha vi or al lo gi c a c c o r d i n g to the p e c u l i a r i t i e s of its labor market.

In the U n it ed States, it is p r e d o m i n a n t l y in the consumer services that em pl oy me nt is s i g n i f i c a n t l y i n fl ue nc ed by labor costs. T h e lower rate of gr owth in labor costs in this sector can, ac co rd in gl y, ex pl ai n w h y e m pl oy me nt has gr ow n so d r a m a t i c a l l y pr ec i s e l y in cons um er se rv ic es wi th in the U n it ed States. But this kind of e x p l a n a t i o n ca nnot be invoked for e m pl oy me nt in busi ne ss a n d social services where, instead, a ve ry rapid rate of e m p l o y m e n t g r o w t h is a function of demand an d s e c t o r - s p e c i f i c factors. Hence, it is evident that the c l as si ca l re la ti on be t w e e n pr ic es and q u an ti ti es ap plies on ly to the s e c t io ns of the labor market that em pl oy m o st ly u n s k i l l e d labor. W h e r e m o r e specialized, technical or pr of es s i o n a l labor is required, such as in the social and b u s i n e s s - r e l a t e d services, em pl oy er s appear wi lling to shoulder hi gh er labor costs in order to gain efficiency.

The results for Sw eden reflect the p e c u l i a r i t y of a labor ma rket that has be en s h ap ed by p o li cy decisions. Th e r e as well em pl oy me nt in cons um er se rvices is n e g a t i v e l y related to labor costs. Yet, the d i re ct io n of change has been

(23)

op posite to the Am er i c a n . For Sweden, ho we ve r, it is the behavior w i t h i n the p u b l i c sector w h i c h is m o s t inte re st in g. Its h i gh ly s i g n i f i c a n t n e g a t i v e r e la ti on b e t w e e n la b o r costs a n d e m pl oy me nt c a n o b v i o u s l y not be a t t r i b u t e d to the rule of the m a rk et ; instead, it is a f u n c t i o n of g o v e r n m e n t ' s commit me nt to s u s t a i n e d full e m p l o y m e n t a n d c o l l e c t i v e social services.

V

In Ge rm an y, the s t a g n a t i o n of s e r v i c e e m p l o y m e n t ca n best be a t t r i b u t e d to r i si ng labor costs, an d to the s l o w g r o w t h of ag gr e g a t e de mand. For Ge rm an y, the m a r k e t rule that pr oduces a n i n v e r s e c o r r e l a t i o n b e t w e e n la bo r co s t s and se rvice e m p l o y m e n t seems to be m o r e p e r v a s i v e . W h i l e th is is c o ns is te nt w i t h p r e v i o u s anal ys es , our r e s u l t s s u g g e s t that the ef fe ct a l s o p e r t a i n s to part s of the s e r v i c e sector.

Finally, o u r c o m p a r a t i v e a n a l y s i s for t h e 1970s a n d 1980s al lo we d us to te st the d e g r e e to w h ic h, in effect, gr e a t e r wage f l e x i b i l i t y e x p l a i n s the a b i l i t y of the A m e r i c a n ec on om y to act as a "g re at job m a c h i n e " . In c o n t r a s t to other studies, we s h o w that this a r g u m e n t is not v a l i d for the m a n u f a c t u r i n g sector, and that it r e a l l y o n l y p e r t a i n s to those p r i v a t e s e r v i c e s wh ic h p r i m a r i l y rely on u n s k i l l e d labor and, t h e r e f o r e , do not fa ce a n y la bo r s u p p l y cons tr ai nt . It is a l s o d o u b t f u l w h e t h e r the A m e r i c a n e x p e r i e n c e is t r a n s f e r a b l e to ot h e r c o u n t r i e s ; in the U n i t e d States, the la b o r fo r c e in these s e r v i c e s is less u n io ni se d, a n d r e pr es en ts g e n e r a l l y the c o m p e t i t i v e "s eg m e n t " of the labor ma rket. © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(24)

Sectoral average growth rates (per cent) Business s e rv ic e s : Consuter s e rv ic e s : Social s e rv ic e s :

United States 5weden 6ereany 1948-86 1970-1986 1963-86 1970-1986 1970-1986 1 M anufacturing eeployient 0.56 -0.30 -1.15 -1.24 -1.25 re a l labo r costs 2.97 2.91 3.49 2.41 3.25 2 Wholesale eeployient 2.05 2.31 0.37 -0.07 ♦ -0.05 re a l labo r costs 2.53 1.70 1.99 1.39 3.15 3 R e ta il eeployient 2.51 2.90 » 0.42 re a l labor costs 1.25 0.29 2.96 4 Finance eeployient 3.53 3.52 ** 2.64 1.78 2.25 re a l labo r costs 1.71 1.36 -0.25 -0.50 2.02 5 Insurance eeployient 0.90 0.95 0.66 re a l labo r costs 0.63 0.76 0.67 6 Business eeployient 6.58 6.46 1.52 2.72 n.a. re a l labor costs -0.65 -0.86 3.94 1.94 n.a. 7 H otels and resta urants

eeployient 2.76 3.60 -0.37 0.02 2.66 re a l labor costs 0.04 -0.98 -1.03 -1.58 0.46 8 Personal services

eeployient 0.44 2.00 -2.18 -2.53 n.a. re a l labo r costs 0.62 -1.87 2.25 2.32 n.a. 9 Aeuseeent and re cre a tio n

eeployient 1.77 3.30 3.48 2.87 n.a. re a l labor costs 1.07 1.00 1.74 3.07 n.a. 10 A utorepair

eeployient 3.42 4.82 -3.38 -4.52 n.a. re a l labo r costs 0.88 0.02 3.51 3.36 n.a. 11 Repair

eeployient 2.54 3.58 0.69 1.10 n.a. re a l labo r costs 0.38 0.81 4.12 2.66 n.a. 12 Health eeployient 5.39 5.60 1.29 2.42 5.66 re a l labor costs 1.84 1.37 0.99 0.20 1.70 13 Education eeployient 3.27 2.81 2.66 2.62 1.42 re a l labo r costs -0.07 -0.35 0.09 0.96 0.76 14 Social services eeployient 3.59 2.15 2.04 2.27 n.a. re a l labo r costs 0.19 0.34 -0.56 -0.14 n.a. IS 6overneent eeployient 2.51 0.88 3.87 3.38 1.87 re a l labo r costs 0.12 0.15 -0.36 -0.37 0.58 lb Other services n .e .c . e e ployient 1,79 re a l labo r costs 1.07 * Includes resta urants,

t * Finance and insurance

t t * 1974-86 + Wholesale and r e t a il © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(25)

! United States ! 1948-86 1963-86 Seraany 1970-1986 ! re a l cost ! incoae ! of labo r ! per.cap.

real cost ! incoae of labor ! per.cap. re a l cost ! incoae of labor ! per.cap. 1 M anufacturing ! -1.54 2.30 -0.62 -0.27 -0.65 0.40 ! (-9.43 ) (8.37) (-3.95) (-0.550 (-2.47) (0.808) 2 Wholesale ! -0.49 1.51 -0.26 -0.08 -1.03 1.17 ! (-5.80 ) (10.0) (-1.76) (-0.187 (-4.44) (2.77) 3 R e ta il ! -0.59 1.39 -1.15 1.12 i (-6.07 ) (11.6) (-2.95) (2.15) 4 Finance ! -0.15 1.66 -0.66 0.24 -0.26 1.07 ! (-1.30 ) (11.3) (-1.55) (0.607) (-4.16) (4.20) 5 Insurance 0.04 0.15 0.23 0.57 (0.905) (0.506) (2.26) (1.45) 6 Business ! -0.57 2.96 0.45 0.82 1 (-1.92 ) (17.7) (1.53) (2.17) 7 H o te ls and ! -0.32 1.61 -0.36 -0.50 0.88 1.14 re s ta u ra n ts 5 (-3.39 ) (15.0) (-2.99) (-1.64) (2.36) (4.9) 8 Personal services ! -0.62 0.20 -0.26 -1.38 1 (-3 .1 ) (1.20) (-2.44) (-3.78) 9 Aausenent and : o . o 6 1.62 0.19 0.84 re c re a tio n ! (0.261) (10.3) (1.24) (1.96) 10 A u to re p a ir ! -0.76 2.45 -0.65 -1.64 1 (-4.96 ) (17.5) (-3.86) (-3.35) 11 Repair ! -1.58 1.90 0.27 -0.18 ! (-1.45 ) (8.77) (1.77) (-0.431 12 H ealth ! 0.46 2.22 0.08 0.98 0.16 1.45 : (3.04) (11.7) (1.00) (2.59) (0.753) (3.24) 13 E ducation 1 0.95 1.72 0.06 0.82 -0.38 0.80 : (3.06) (16.6) (0.413) (1.09) (-0.42) (2.46) 14 S o cia l services ! -0.15 0.97 -1.37 0.62 ! (-0.204 (4.90) (-3.35 ) (1.5) 15 Sovemaent ! 0.29 0.69 -1.37 1.60 -0.63 0.74 ! (7.02) (7.15) (-6.60) (6.73) (-2.18) (2.18) 16 Other se rvic e s -1.36 1.63 n .e .c . (-4.72) (6.47)

! N.obs. 504 DM 1.6 N.obs. 294 DM 1.5 N.obs. 140 DM 1.3 ! Adj.Rsq .99 Adj.Rsq .99 Adj.Rsq .99

Mote: in parentheses are t s t a tis tic s .

(26)

Table 3 F tests For pooling

United States Seeden 6eriany

1 1 9 48-86 11 1970-1986 ! 1963-86 1970 -1 9 8 6 !i 1970 -1 9 8 6 1 1 HO! c o e t o n i n t e r c e p t » 1 F (48, *27)=34 F ( 2 6 , 141)=22 ! F 1 3 3 , 2 3 2 1 = 1 8 0 F ( 2 6 , 1411=72 ì F (22,971=263 ! ! r e j e c t reject ! r e ject r e j e ct ! r e j e ct ! HO: c o e e o n i n t e r c e p t ! F 1 1 3 , 4 2 7 1 =4 2 F I 1 3 , 1411 = 18 i F 1 1 3 , 2 3 2 1 = 1 9 2 F I 1 3 , 1411=24 1 F < 9 , 9 7 1 = 26 6 1 for all g r o u p s •* ! r e j e ct reject 1 rej e ct r e j e ct ! r e j e ct 1 H 0 : c o « « o n t i e e p a t t e r n *♦* 1 F 1 3 5 , 4 2 71=13 F ( 1 3 , 14 1 ) s 10 1 F ( 2 0 , 23 2 1 = . 3 7 F U 3 , 1 4 t ) = . 9 1 F ( 1 3 , 9 7 ) = l . 4 1

! r e j e c t reject ! accept a c c e pt ! acc e pt i

HO: c o e e o n c o e f f i c i e n t s a 1 F (9,4 27 1 = 2 F 1 9 , 1411 = 10 ! F 1 8 , 2321=1 F 1 8 , 1411=3 : ♦♦

I a c cept reject ! accept r e j e ct 1

» F test for jo in t sign, of tiee and group dunies. »» F test for jo in t sig. of group dunies. *♦» F test for jo in t sign, of tiee dueeies

* F test for equality of coefficients of labor cost in grouped sectors

♦♦ Not enough groups for eeaningful pooling © The

Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(27)

; States — rea l cast of Ubar ! re a l cost ! of labor re a l cost of labor 1 M anufacturing ! -2.01 ! -0.57 -0.65 (-5.52) 1 (-3.52) (-2.47) 2 Wholesale ! -0.25 ! -0.01 -1.03 i (-2.05) ! (-0.03) (-4.44) 3 R e ta il 1 -2.87 ; _-1.15 1 (-2.23)

₁

(-2.95) 4 Finance ! -4.17 ! -0.16 -0.24 Ì (-1.56) 1 (-0.42) (-4.16 ) 5 Insurance ! : o .o i i 0.23 S : ( o . in ii (2.24) 6 Business ! H).M 1 0.74

1

(-1.64) i (1.57) 7 H o te ls and ! -1.41 ! -0.02 i 0.88 re s ta u ra n ts i (-4.84) ! (-0.14) ii (2.34) 8 Personal se rvice s ! -4.17 ! -0.30 i (-1.93) ! (-2.74 ) i 9 Aauseient and ! 0.44 ! -0.06 ii re c re a tio n ! (1.15) ì (0.44) i 10 A u to re p a ir ! -2.14 ! -0.72 ii i I (-2.38) : (-2.94) ii 11 Repair 1.27 ! 0.47 ii (1.38) 1 (3.50) 12 Health 4.11 Î 0.17 0.16 ! (7.51) I (2.24) (0.753) 13 Education -1.06 : o.4o -0.38 (0.54) : (5.40) (-0.42 ) i 14 S o c ia l se rvice s 4.48 : -3.21 ii (-0.20) 1 (-2.64 ) ii IS 6overnaent 4.34 : -1.86 -0.63 14.12) 1 1-7.87) ii (-2.18) 16 Other se rvice s | _ii _-1.34 n .e .c . ! ii (-4.72)

N.obs. 196 ! N.obs. 196 N.obs. 140

(28)

(29)

1 The t e r t ia ri za ti on of the labor force was already recognized by Fisher (1939) and Clark (1940). More recently, it has been d o cu me nt ed in Stigler (1956), Kuznets (1957), Fuchs (1968), S i ng el ma nn (1974;1978), Browning and S i ng el ma nn (1975), and, most recently, in Elfring (1988). A p r in ci pa l p r o b l e m in the sectorial ap pr oa ch to service employment, c o n c e p t u a l as well as empirical, is h o w to dr aw me an i n g f u l boundaries. In many cases, what we regard as se rvice e m pl oy me nt occurs within traditional m a n u f a c t u r i n g enterprises.

2 G e r s hu ny (1978) and G e r s h u n y and M i l e s (1983) pr op os e a rather pe ss i m i s t i c scen ar io for se rvice employment growth on the gr ou nd s that rising ho us e h o l d p u rc ha si ng power will p r im ar il y pr o m o t e the p u rc ha se of "self-servicing" te ch no lo gi es (microwave ovens, video- re co rd er s, etc). Clearly, this ar gu me nt pert ai ns to personal and re cr ea ti on al services, and not to b u s i n e s s - or social and health services.

3 Po me re hn e and Schneider (1980) su ggest that the model pe rforms p o o r l y for the E u ro pe an economies. As Baumol himself suggests, se rvice employ me nt m a y continue to grow, de sp it e the "cost disease" problem, wher e the public sector stimulates the e x pa ns io n of services. To give an example, in Sw ed en the pu bl ic sector accounts for more than 75 pe rc en t of all new net em pl oy me nt growth over the past two de ca de s (Es pi ng -A nd er se n, 1990).

In a recent study, Sharpf (1985) p r e s e n t s an explanation that st resses the i n t e ra ct io n of g o v e r n m e n t and inter sectoral wage di ff er en ti al s. In summary, the ar gument is that p r iv at e sector se rv ic e jobs will fail to g r o w when in te r- se ct or al wage d i f f e r en ti al s are small; the go ve rn me nt may, in this case, c o m p e n s a t e with public employ me nt but this, in turn, de p e n d s on its fiscal capacity.

4 G o rd on (1987) has a r g u e d that wa ge s in the Un it ed States are not m o r e flexible.

5 That we are not able to d i s t i n g u i s h public s o c i a l / h e a l t h / e d u c a t i o n employ me nt f r o m other acti vt ie s is less pr ob l e m a t i c than mi g h t appear at first. By a n d large, it is the case that al mo st all p u b l i c sector employ me nt gr ow th over the pa st two de cades has o c c u r r e d in the broad social se rvices area, wh i l e trad it io na l fields of public employment such as a d mi ni st ra ti on , law and order have been quite stagnant. Hence, wh en we m o n i t o r ch anges in "Government" em pl oy me nt , we are m a i n l y iden ti fy in g the rate of change in p u b l i c s o c i a l / h e a l t h / education.

6 For a d i s c u s s i o n of ra nd om c o e f f i c i e n t s models, see Judce et.al (1985). © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute

(30)

7 Most of the e m pl oy me nt g r ow th in retail c a n be at tr ib ut ed to the sh ar p in crease in e m pl oy me nt w i th in ea ti ng and drinking pl ac es (Bureau of Labo r Statistics, Em pl oy me nt and Earnings, v a ri ou s years; a n d M o nt hl y Labor Review, August, 1986).

8 As noted earlier, the real cost of labor in bu siness service w i th in the U n i t e d States has a c tu al ly declined. As we argued, this is mo st p r o b a b l y the result of a rapid pr ic e increase for the services.

R E FE RE NC ES

BAUMOL, W. J., (1967), "M ac ro ec on om ic s of U n b a l a n c e d Growth: The An at om y of U r b a n Crisis", A m e r i c a n E c o n o m i c Review, J u n e , p p . 415-26.

BAUMOL, W. J., (1985), "U nb al an ce d G r o w t h Revisited: A s ym pt ot ic St ag n a n c y and New Evidence", A m e r i c a n Ec onomic Review, S e p t .,p p . 80 6-817

BLANCHARD, O . , DORNBU SC H, R. A N D LAYARD, R. (1986), R e st or in g Eu rope's Prosperity. Cambridge, Mass: M I T Press BROWNING, H. A N D SI NG EL MA NN , J. (1975), The Em er g e n c e of the Service Society: D e m o g r a p h i c and So ci ol o g i c a l A s pe ct s of the Sectoral T r a n s f o r m a t i o n of the Labor Force in the United States. Springfield, VA: N a t i on al T e ch ni ca l In fo rm at io n Service.

BR UN O M. a n d J. SACHS (1985), The Econ om ic s of W o rl dw id e Stagflation. Oxford: Basi l Blackwell.

B U RE AU O F EC ON OM IC A N AL YS IS , (1986), "National Income and Product A c c o un ts of the U n i t e d States", su pp l e m e n t s to the Survey of Cu rrent Business, va ri ou s years.

B U RE AU O F LA BO R STATISTICS, "Employment, Hour s and E a r n i n g s " ,va rious years.

CLARK, C., (1940), The C o n d i t i o n s of E c on om ic Progress. London: MacMillan.

ELFRING, T. (1988), "Service Em pl oy me nt in A d v a n c e d Economies", un pu b l i s h e d d o ct or al di ssertation, U n i v e r s i t y of R o tt er da m

ES PI NG -A ND ER SE N, G. (1990), The Th re e W o rl ds of We lf ar e Capitalism. Cambridge: P o li ty Press.

(31)

FRANZ, W. and H. KONIG, (1986), "The N a tu re and Ca us es of U n em pl oy me nt in the Federal Repu bl ic of Ge rm an y since the 1970s: An E m pi ri ca l Investigation", Economica, 53, S219-S244.

FUCHS, V. (1968), The Service Economy. N e w York: Na tional Bureau of E c o n o m i c Research.

GE RS HU NY ,J .I .( 19 78) , After Industrial Society; The Em erging Self -S er vi ce Economy. London: Macmillan.

GERSHUNY,J., I., I.D. MILES, (1983), The New Service Economy: The T r a n s f o r m a t i o n of Em pl oy me nt in Industrial Societies. London: F. Pinter.

GIERSCH,H., 1983, "Arbeit, Lo hn und P r o d u k t i v i t a t . Pr ob le me und P e r s p e c t i v e n der g e g e n w w a r t i g e n W i r t s c h a f t s p o l i t i k " , Mannheim: B i b l i o g r a p h i s c h e s Institut.

GORDON, R . J . , (1987), "Wage Gaps vs. O u tp ut Gaps: Is there a common Stor y for All Europe?", N.B.E.R. wo rk in g paper, 2454 D e c e m b e r .

HAUGEN, S. E., (1986), "The em pl oy me nt E x pa ns io n in Retail Trade", M o n t h l y Labor Review, August, pp. 9-17.

JUDGE, G.G., W. E. GRIFFITHS, R. C A RT ER HILL, H. LUTKEPOHL, T S O U NG -C HA O LEE, (1985), The T h eo ry a n d P r ac ti ce of Econometrics, s e co nd edition. N e w York: W i l e y and Sons. KUZNETS, S. (1957), "Q ua nt it ai ti ve as pe ct s of ec onomic growth of nations, II: Indust ri al di st ri b u t i o n of national product and labor force". E c on om ic D e v e lo pm en t and Cultural Change, 5 (July). Supplement.

MO NT HL Y L A B O R REVIEW, (1986), August.

OECD, (1985 a n d 1987), E c o n o m i c Survey: Germany. Paris: OECD.

OE CD (1988 and 1989), E c o n o m i c Survey: Sweden. Paris: OECD. OE CD (1986 and 1987), E c o n o m i c Survey: The U n i t e d States. Paris: OECD.

POMEREHNE, W. a n d SCHNEIDER, F. (1980), " U n b al an ce d G r o w t h between P u b l i c and Pr iv at e Sectors". Paper pr e s e n t e d at the IIPF Co nf erence, J e r u s a l e m (August).

(32)

SHARPF, F. (1985), " B e s c h a e f t i g u n g s p o l i t i s c h e St ra t e g i e n in der Krise". Leviathan, 13.

SINGELMANN, J. (1974), The Sect or al Tr a n s f o r m a t i o n of the Labor Force in Seve n In d u s t r i a l i z e d Countries, 1920-1960. Ph.D. disser ta ti on , U n i v e r s i t y of Texa s - Austin.

SINGELMANN, J. (1978), "The Se ct or al T r a n s f o r m a t i o n of the Labor Fo rc e in Seve n In d u s t r i a l i z e d Countries, 1920-1970." Am er ic an Jo ur na l of Sociology, 83, 5.

STIGLER, G. (1956), Tr en ds in E m pl oy me nt in the Service Industries. N e w ¥ork: N a t i o n a l Bu re au of E c on om ic Research. WHITE, H, (1982), "M aximum L i k e l i h o o d Es ti m a t i o n of M i s s p e c i f i e d Mo dels", E c on om et ri ca , 50, pp.1-26. © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(33)

U n i t e d States

Da ta Sources by Industry: 1) The Nati on al Income and Product A c c o u n t s of the U n i t e d States 1929-1982. U.S. D e p a r t m e n t of C o m m e r c e / B u r e a u of Ec on om ic Analysis, S e pt em be r 1986. 2) S u r v e y of Cu rr en t Business, B.E.A., July 1987 / Vol. 67 no. 7.

F u ll -t im e e q ui va le nt empl oy ee s (the number of em pl o y e e s on full -t im e schedules, plus the number of em p l o y e e s on part- time schedules c o n v e r t e d to a full-time basis): table 6.7B; G N P in b i ll io ns of do ll ar s table 6.1; GNP in co nstant dollars: table 6.2; c o m p e n s a t i o n of employees: table 6.4B. Income per capita: The E c on om ic Report of the Pres id en t 1988. Population, p.279; GNP, p.246.

Sweden

T h e Swedish N a t i o n a l Acco un ts do not supply the full-time eq ui va le nt e m p l o y m e n t data. We have el ab o r a t e d it divi di ng the total number of hours w o rk ed by the number of hours w o r k e d by a f u ll -t im e employee. The in du st ry data sources are: Em pl oy me nt and C o m p e n s a t i o n of employees, and P r o d u c t i o n and Fa ct or Income, National A c c o u n t s An nu al Reports, St at i s t i s k a Centra lb yr an , va ri ou s years. Hours worked: table 5:8. C o m p e n s a t i o n of employees: table 5:11. For g o ve rn me nt tables 5:10, 5:12 and 5:13. GDP current prices: table 4:2. GDP co ns ta nt 1980 prices: table: 4.4. Av e r a g e w e e k l y ho u r s wo rked by a full-time ma le by industry: A K U A r s m ed el ta l (Labour Force Survey), va r i o u s years.

Ge rm an y

T h e G e rm an N a t i on al A c c o u n t s neither su pp ly the fu ll -t im e e q ui va le nt e m pl oy me nt da ta nor the total number of hours

(34)

worked. We ha ve therefore c o rr ec te d the em pl oy me nt data given by the n.a. using the pe rc e n t a g e of part-time employees by i n d u st ry su pplied by the Mi kr ozensus. The data sources are: N a t i o n a l Accounts, tables by branch, 1960-1985, St at is ti sc he s Bundesamt, A u gu st 1987 and Ko nt en und St a n d a r d t a b e l l e n fach se ri e 18, reihe 1, 1987.

The m i k r o z e n s u s da ta are p u b l i s h e d in: B e vo el ke ru ng und Erwe rb st ae ti gk ei t, reihe 4.1.1 , tables 13 and 14, various years. © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(35)

Mean Std.Dev. M i n i m u m Maximum Manufa ct ur in g f te 17731 1628 14368 20683 cl 18692 5788 10173 30761 Wholesale f te 3797 947 2528 5549 cl 19557 5116 11282 28881 Retail f te 9132 2683 5805 14866 cl 13073 1600 9107 14897 Finance f te 3381 1300 1635 6088 cl 18075 3784 12588 24065 Business f te 2367 1641 581 6451 cl 23588 1272 20690 26596 Hotels f te 692 254 428 1255 cl 13414 1018 11226 14770 Personal f te 824 59 741 997 services cl 13204 1631 9899 15951 Amusement f te 556 164 394 886 cl 15570 1499 12415 18450 Autorepair f te 377 173 189 779 cl 15060 1810 12077 17488 Repair f te 182 67 110 312 cl 18376 931 16421 20383 Health f te 2695 1692 825 6022 cl 16346 3715 10785 21123 Education f te 799 312 409 1381 cl 14995 407 14135 15960 Social Se rvices f te 1558 584 669 2524 cl 12699 303 12128 13264 Government f te 12921 3006 6812 16992 cl 22812 431 22033 23716 FTE: full-time e q ui va le nt employees; thousands

CL : real labour costs; thousands of do llars

(36)

M e a n Std.. D e v . Mi ni mu m Maximum M a n u f a ct ur in g f te 736 69 623 827 cl 104 23 61 134 W h ol es al e f te 324 15 293 349 and Retail cl 102 14 76 119 Finance f te 33 4 23 41 cl 127 9 109 147 Insurance fte 16 1 14 17 cl 182 24 153 233 Business fte 67 10 53 88 cl 136 27 70 164 Hotels fte 49 4 42 58 and rest. cl 73 9 53 90 Personal fte 22 5 16 29 services cl 83 19 55 107 Am us em en t fte 19 4 11 24 cl 108 24 77 138 Au to re pa ir fte 29 10 18 43 cl 79 21 49 107 Repair fte 3 0 3 3 cl 92 19 51 125 H e al th fte 17 2 14 21 cl 110 16 89 141 E d uc at io n fte 16 3 11 20 cl 110 14 84 132 Social Services fte 21 3 16 27 cl 151 10 139 174 G o ve rn me nt fte 644 172 366 872 cl 137 4 132 145 FTE: fu ll - t i m e e q ui va le nt employees; thousands

CL : real labour costs; th ou sa nd s of Sw ed is h kronas

(37)

M e a n Std.■ Dev. M i n i m u m Maximum Ma nu f a c t u r i n g f te 8422 646 7504 9460 cl 35 6 25 42 W h o l e s a l e f te 1096 35 1050 1169 cl 35 5 26 43 Retail f te 1425 65 1294 1531 cl 27 4 20 32 Fi nance f te 484 45 393 559 cl 41 4 36 48 Insurance f te 195 5 181 201 cl 48 4 42 56 Ho te ls f te 411 57 323 488 and rest. cl 21 1 20 23 H e al th f te 321 79 178 427 cl 23 2 21 27 E d uc at io n f te 170 11 153 192 cl 41 1 38 43 Othe r ser. f te 975 92 872 1156 cl 28 2 25 29 Go ve r n m e n t f te 3460 298 2834 3805 cl 44 1 42 46 FTE: full -t im e e q ui va le nt employees; thousands

CL : real labour costs; thou sa nd s of D-marks

(38)

(39)

E U I Wo r k i n g P a p e r s a r e p u b l i s h e d a n d d i s t r i b u t e d b y t h e E u r o p e a n U n i v e r s i t y I n s t i t u t e , F l o r e n c e .

C o p i e s c a n b e o b t a i n e d f r e e o f c h a r g e - d e p e n d i n g o n t h e a v a i l a b i l i t y o f s t o c k s - f r o m :

T h e P u b lic a tio n s O ffic e r E u ro p e a n U n iv e rs ity In stitu te B a d ia F ie so lan a I - 5 0 0 1 6 S an D o m e n ic o di Fie so le (F I) Italy © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute

(40)

T o T h e P u b lic a tio n s O ffic e r E u ro p e a n U n iv e rs ity In s titu te B a d ia F ie s o la n a I - 5 0 0 1 6 S an D o m e n ic o di F ie s o le (F I) Ita ly F ro m N a m e A d d re s s P le a s e se n d m e th e fo llo w in g E U I W o rk in g P a p e r(s ): N o . ... A u th o r, title : ...' ... D a te S ig n a tu re © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

Labor costs and employment in the service economy

W ORKING

PAPERS

Mp

32 a

eoa

Labor Costs and Employment

in the Service Economy

r

Labor Costs and Employment

in the Service Economy

1

1

Sharing in the Industry

89/371

Klaus-Dieter STADLER

Die Europâische politische

Zusammenarbeit in der

Generalversammlung der

Vereinten Nationen zu Beginn

der Achtziger Jahre

8 9 /3 7 2

Jean-Philippe ROBE

Countervailing Duties, State

Protectionism and the Challenge

of the Uruguay Round

8 9 /3 7 3

G. FEDERICO/A. TENA

On the Accuracy of Historical

International Foreign Trade

Statistics.

Morgenstern Revisited

8 9 /3 7 4

Francisco TORRES

Small Countries and Exogenous

Policy Shocks

8 9 /3 7 5

Renzo DAVIDDT

Rouble Convertibility:

A Realistic Target

8 9 /3 7 6

Jean STAROBINSKI

Benjamin Constant: la fonction

de l’éloquence

89/378

Stephen MARTIN

The Welfare Consequences of

Transaction Costs in Financial

Markets

89/379

Augusto DE BENEDETTI

L’equilibrio difficile. Linee di

politica industriale e sviluppo

dell’impresa elettrica nell’Italia

meridionale: la Società

Meridionale di Elettricità nel

periodo di transizione, 1925-

1937

Christine KOZICZINSKI

Mehr “Macht” der Kommission?

Die legislativen Kompetenzen

der Kommission bei Untàtigkeit

des Rates

89/381

Susan SENIOR NELLO

Recent Developments in

Relations Between the EC and

Eastern Europe

89/382

Jean GABSZEWICZ/

Paolo GARELLA/

Charles NOLLET

Spatial Price Competition With

Uninformed Buyers

₁