“Escaping the Stagnancy Trap. Unbalanced Growth and Employment in the Services”

In this paper we carry out an in-depth discussion of Baumol’s model of “unbalanced growth”, a fundamental reference to analyse the effects of technical progress and the long-term development of the service sector. Although some empirical evidence confirms the stylised facts of the model, its uncomfortable predictions cannot be considered as true. After 1973 productivity has slowed down in all industrialised countries and employment growth has concentrated in the slow-productivity service sector, but such outcomes are marked by high cross-country differences. Therefore, it is useful to identify what assumptions of the model may be relaxed in order to escape what we call the “stagnancy trap”. We find that new technologies and organisational improvements can expand the boundaries of the progressive sector and thus delay the asymptotic stagnation of aggregate productivity, even though they may leave the long-term tradeoff between productivity and employment growth unchanged.