In order to clarify the theoretical implications of recent employment growth in the services – and its link to the development of knowledge economy and information technologies - the paper presents an in-depth discussion of the Baumol model of “unbalanced growth”. Although some empirical evidence confirms the stylised facts of the model, its uncomfortable predictions cannot be considered as true. By successively relaxing its four main assumptions (constant labour pool, long-term invariance of sector shares, closed economy and homogeneous wage growth), the authors explore the theoretical implications of the model and their policy consequences. It comes out that a major way to escape the “stagnancy trap” can be provided by new technologies and organisational improvements that transfer technical progress into previously non-progressive service industries.
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