The role played by labor differentiates the service sector from the goods producing sector. Will Baumol argued that in the goods sector labor is primarily an instrument, an incidental requisite to the attainment of the final product, while in the service sector, labor is itself the end product. One sector is assumed to be technically progressive, the other static. Over time, an ever larger fraction of labor must be employed in the static sector. The share of the workforce employed in the service sector rose from 51 per cent in 1950 to 76 per cent in 1990. It is claimed that technical progress has historically exhibited a goods bias. The increasing importance of services must ultimately inhibit the rate of growth for the economy as a whole. Output per hour, X/H, is a valid measure of labor productivity if employee hours are homogeneous. But labor is heterogeneous. Productivity is a function of worker characteristics, sex, age (a proxy for experience), and education. When the composition of employee hours is adjusted for changes in these human capital, supply side variables, an employee hour today is 18.19 per cent more productive than an hour supplied by a worker in 1950. On the demand side, employers can affect productivity by varying the effort intensit
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