The Employment Impact of Differences in Dmand and Production

See Table 3

The concept of the vertically integrated sector stresses the important role played by the
intermediate stages of production and the linkages between industries through these. As has
recently been emphasized by Oulton (2001), industries with low productivity growth do not
necessarily average the economy’s productivity growth rate downwards towards zero. This
applies only if their output is exclusively for final use. To the extent that stagnant industries
produce for intermediate demand any (positive) productivity growth there adds to the
productivity growth rate in the using sectors. Comparing relative growth rates of productivity in
final production only may be misleading as a measure of the sector’s contribution. The next step
in our analysis is therefore to examine the nature and extent of this interdependence across
sectors. In particular we will distinguish between the share of new jobs generated that are
located within the sector receiving the demand stimulus, the share arising in other sectors
within the Manufacturing or Services group, and the share that spills over between these broad
groups. Table 4 shows these shares for each year and country.

See Table 4

When demand is allocated to one of the sectors within Manufacturing on average between one-
half and two-thirds of the jobs created occur within the sector itself. This share has been very
stable within each economy, with only the Netherlands and Spain and (marginally) the US
showing a declining trend. When the demand injection is to one of the Services sectors the
proportion retained is significantly higher, at around three-quarters.⁷ This share has tended to
fall over time in half of our countries (US, UK, and the Netherlands), while increasing in the
others (Germany, France, and Spain).

The jobs not retained within the original sector spill over to the rest of the economy as
encapsulated in the vertically integrated sector. Here the trends are striking. From an original

⁷ Within Manufacturing we have between 19 and 26 sectors, depending on country and year, while only seven
Services sectors can be distinguished. For Manufactures therefore the shares ‘retained’ will be smaller and the
share attributed to ‘within sector spillover’ larger than in Services. The spillovers between Manufactures and
Services are unaffected by the number of available sectors.

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