Do service sectors need core sectors to improve their productivity?

• Published in: Eurasian economic review Vol. 7; no. 3; pp. 389 - 410
• Main Author: Kazekami, Sachiko
• Format: Journal Article
• Language: English
• Published: Cham Springer International Publishing 01.12.2017; Springer Nature B.V
• Subjects: Competition; Economic growth; Economic models; Economic policy; Economics; Economics and Finance; Efficiency; Employees; Employment; International trade; Investigations; Local economy; Manufacturing; Municipalities; Original Paper; Per capita; Productivity; Regions; Retail sales; Service industries; Spillover effect; Supply & demand; United States > US; Japan; Manufacturing sectors; Local economy; O47; R11; Employment in service sectors; Specialized sectors; D24; J21; Productivity of service sectors
• ISSN: 1309-422X; 2147-429X
• DOI: 10.1007/s40822-017-0073-1

Examining Japanese micro-data, this study demonstrates that large core sectors (specialized or manufacturing sectors) in a local economy improve the productivity in the local non-tradable service sectors, and thereby increase employment. The size of service sector demand is determined by the size of the local economy, which, in turn, is determined by these large core sectors. The core sectors are generally sectors with tradable goods and services and their demand is not limited by the local market size as their goods and services supply multiple regions. A large demand for the service sectors induces heightened competition and improves their productivity through Darwinian selection or efficiency improvements within firms. Moreover, the spillover effect from core sectors might affect local service sectors. As a result, a 1% increase in added value in the specialized sectors in the previous estimation period, as well as a 1% increase in the change in added value in the specialized sectors, and a 1% increase in added value in the manufacturing sectors in the previous estimation period affect an increase in the productivity of the service sectors by approximately 4–5, 4 and 2.5%, respectively. Moreover, an increase of 100 thousand dollars of added value in the specialized sectors increases employment by 26 employees in the local service sectors. Furthermore, this study confirms efficiency improvements within firms as a productivity mechanism.