Service Sector Dynamics & the Role of ICT
The service sector is usually perceived as being stagnant i.e., characterized by low productivity growth and rising relative prices. In recent decades, evidence suggests otherwise. Recent endogenous growth models incorporate information and communication technology (ICT) as an additional source of labour’s generic skill level utilized in the service sector. We formulate a theoretical model in which we analyse the dynamics of aggregate labour productivity growth within the service sector. We divide all the service activities into two groups: ICT-producing service activities and ICT-using service activities. Labour is the only input, and its generic skill level is determined by a measure of human capital and ICT knowledge which grow endogenously. ICT knowledge, both codified and tacit, plays an important role in the allocation of labour resources and therefore in the aggregate productivity growth of the service sector. This paper considers the presence of dynamic externalities, whereby the output of ICT-producing firms creates new opportunities for the ICT-using firms to make them more productive. Specifically, dynamic externalities result from ICT’s ability to support continuous innovation and learning. We incorporate these characteristics in a simple two sector endogenous growth model in an attempt to analyse the dynamics of service sector’s productivity growth. Accordingly, output of ICT-producing firms, when utilised by ICT using industries, create dynamic externalities. Essentially, these dynamic externalities evolve due to ICT’s ability to support continuous innovation and learning, which, in turn, enable service firms to engage in process innovation that ultimately raises productivity. The overall result is that, given a sufficiently high elasticity of substitution, the ratio between ICT knowledge in the two sectors determines towards which sector labour resources are directed, and thus the aggregate labour productivity growth of the entire service sector.
Keywords: Service Sector Dynamics, Role of ICT, Codified & Tacit Knowledge, Endogenous Growth Model
Prof. Dilip Dutta
Associate Professor in Economics, Discipline of Economics