Structural Change, Service Sector Features, and Aggregate Elasticity of Substitution

Focusing on some relevant features of service sectorService sector, this chapter analyzes the behaviors of endogenous economy-wide elasticity of substitutionEconomy-wide elasticity of substitution that can influence growth and distribution. This chapter deals with the economy of scaleEconomy of scale in the production structure as one of the significant features of the service sector. In contrast, features of the manufacturing sectorManufacturing sector are dealt with the constant return to scale in the production function. To capture these heterogenous features, this chapter develops a two-sector general equilibrium modelTwo-sector general equilibrium model in the monopolistic competitive framework. The analysis shows that not only factor substitutabilityFactor substitutability and commodity substitutabilityCommodity substitutability in the demand for goods, but also the property of economy of scale and its heterogeneity in the economy of scale in each sector are likely to make the aggregate elasticity of substitutionAggregate elasticity of substitution enlarge and fluctuate. This analysis implies that the labor shareLabor share can decline when the structural changeStructural change such as rising service sectorsService sector and declining manufacturing sectors can occur. Because higher derived elasticity of substitutionElasticity of substitution between capital and labor in a macroeconomy is a possible cause of declining aggregate labor shareAggregate labor share in the growth process.