The structural shift to green services: a two-sector growth model with public capital and open-access resources
Produced as part of the Governments, markets and climate change mitigation CCCEP research programme theme
Forthcoming in Structural Change and Economic Dynamics (Dec 2014).
The expansion of the share of economic activity taking place in sectors with low or no impact on ecological resources is a crucial component of the transition to a low-carbon society. This “green” structural change is analysed here by means of a growth model with a ”progressive” manufacturing sector and a ”stagnant” service sector. The latter – which I here name “green services” – represents an increasingly demanded class of activities characterized by high intensity of labour, reduced use of energy and low polluting emissions.
Because of the non-substitutability of human participation these activities exhibit no labour productivity growth, while productivity in the manufacturing grows as a result of the presence of a stock of public capital (infrastructure) in its production function. The two sectors are also different in their impact on an open-access asset representing environmental quality, which enters the households welfare function.
Along the Balanced Growth Path (BGP) a substitution process between consumption of the “dirty” manufactured good and the open-access asset takes place, leading to a stagnation in welfare despite the positive growth rate. Structural change occurs along the transition to the BGP. The share of employment in the service sector expands any time the initial value of the public-to-private capital ratio is above its BGP level.
Finally, the role of infrastructure policies in shaping economy-environment interactions is discussed through a numerical example.