DP12467 | Structural Change within the Service Sector and the Future of Baumol's Disease

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Structural change reduces aggregate productivity growth when it leads to the reallocation of production to industries with low productivity growth. We document that this so-called Baumol's disease considerably reduced productivity growth in the postwar U.S. We capture the effect of Baumol's disease on productivity growth with a novel model of structural change that disaggregates the service sector into services with low and high productivity growth. The data imply that the two service subsectors are substitutes. We find that the substitutability limits how important services with low productivity growth may become, which bounds the future effect of Baumol's disease.