Europe’s lagging service sector

Europe's failure to develop a thriving service sector is the main culprit behind the fact that over the last fifty years, hours worked in Europe have declined by almost 45 per cent compared to hours worked in the United States, says Richard Rogerson, research associate at the National Bureau of Economic Research.

According to Rogerson:

Typically, as a modern economy develops, employment is concentrated first in agriculture, then it moves to manufacturing, and finally, to services.

Europe seems to have made it through the first two phases but then fumbled the transition to the service sector.

This lack of service sector maturation goes a long way toward explaining the deterioration of European labour markets where, for some time now, unemployment rates have far exceeded those for the United States.

This anaemic service sector growth is a by-product of a European tax rate that is 15 to 20 per cent higher than that of the United States, says Rogerson. Consider:

At the same time that changing technology creates an economic force leading to greater hours worked in the service sector, Europe raises taxes, thus creating an opposing force that encourages services to be provided outside the market

In other words, while in the United States it's now the norm for people to pay professional providers for services such as child care, elder care, cooking, cleaning, home repairs, and yard maintenance, Europeans – with taxes taking more of their disposable income – are more likely to do these things for themselves.

Rogerson calls this "home work" as opposed to "market work." And, he notes that there is evidence that if one adds up the hours Europeans spend doing "home work" (which in the United States is more likely to be handled by service providers), it significantly offsets the differences in market work.

Source: Matthew Davis, Europe's Lagging Service Sector, NBER Digest, September/October 2007; based upon: Richard Rogerson, Structural Transformation and the Deterioration of European Labor Market Outcomes, NBER Working Paper No. 12889, February 2007.

For text: http://www.nber.org/digest/septoct07/w12889.html

For report: http://www.nber.org/papers/w12889

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 02 October 2007