The Employment Impact of Differences in Dmand and Production

pattern of offsetting roles for demand and productivity changes is repeated, but with two
significant differences. Firstly, the balance between the job creation and job loss is now typically
positive, with the employment expansion from demand growth outstripping the reductions due
to productivity gains. Secondly, in a significant minority of cases productivity gains over this
period have been small, on occasion even negative. The most striking instance is in the provision
of Community, Social and Personal Services in the US where on average labour productivity was
falling;¹⁴ further instances can be noted in Germany, France, the Netherlands and Spain.

Structural change, measured by changes in the inter-industry linkages (Leontief inverse) plays at
most a very small role in employment change. This contradicts the hypothesis that the observed
growth in service employment is primarily due to outsourcing, as non-service employers replace
in-house provision of intermediate services by outside purchasing down the vertical integrated
sector.¹⁵ Minor exceptions to this are the UK and the Netherlands. In the UK these structural
changes are concentrated in the Business Services, Financial and Insurance Services, and
Distributive Trades, and mostly during the 1980s, a period of significant economic
transformation under Prime Minister Thatcher (Greenhalgh and Gregory, 2001; Card and
Freeman, 2002). In the Netherlands most of the change in the inter-industry linkages is observed
during the 1990s mainly affecting Business Services.

The analysis so far has looked at final demand in the aggregate. We have seen in previous
Sections that private consumption can behave differently from final demand as a whole. We
therefore now focus on the decomposition of employment changes due to household
consumption. The results for this are given for the six countries individually in Figures 17 - 22.

¹⁴ Negative productivity growth in some US service industries in the period 1973 - 1987 has also been found in
Appelbaum and Albin (1990).

¹⁵ Similar findings have begun to emerge elsewhere. ten Raa and Wolff (1996) find that growth in manufacturing TFP
is due mainly to input saving (in capital and labour), with a much smaller part due to outsourcing. Gregori (2000) in
his analysis of a time series of Italian input-output tables for the period 1960 - 1985 also finds that changes in the
inter-industry linkages (outsourcing) play only a minor role in the growth of service employment. Heshmati (2003)
in his survey reports that managers tend to overestimate the cost reduction aspects of outsourcing; moreover,he
finds that outsourcing is often a consequence of output growth.

However, it should be noted that intermediate demand for Business Services may be underestimated. The
purchase of software, previously treated as the purchase of an intermediate good, is now classified as investment
and excluded from the input -output table. This change of classification would underestimate the shift towards the
use of Business Services.

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