Lei Fang and Berthold Herrendorf
Working Paper 2019-21a
November 2019 (revised June 2021)

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Abstract: We document that the employment share of high-skill-intensive services is much lower in China than in countries with similar gross domestic product (GDP) per capita. We build a model of structural change with goods and low- and high-skill-intensive services to account for this observation. We find that large distortions limit the size of high-skill-intensive services in China. If they were removed, both high-skill-intensive services and GDP per capita would increase considerably. We document a strong presence of state-owned enterprises in high-skill-intensive services and suggest that this leads to important distortions.

JEL classification: O41, O47, O51

Key words: China, high-skill intensive services, state-owned enterprises, structural change


The authors have received useful comments and suggestions from the editor, Daniel Yi Xu, and several anonymous referees; from their discussants Mark Spiegel, Michael Sposi, Yang Tang, and Wen Yao; from Simon Alder, Georg Duernecker, Alex Monge, Akos Valentinyi, and Xican Xi; from seminar and conferences participants at the U.S. Bureau of Economic Analysis, the China International Conference in Macroeconomics (2019, Shenzhen), the Christmas meetings of the German Expat Economists (2019, Frankfurt), the Conference on Macroeconomics and Survey Data at CESifo (2020, Munich), the Economics-PhD-Reunion Conference (2019, ASU), the Economic Growth and Fluctuations Group of the Barcelona Summer Forum (2019, Barcelona GSE), the fall conference on Growth and Human Capital (2019, St. Louis Fed), the Fed System Macro Conference (2019, Dallas Fed), the fourth biennial conference of China Development Studies (2019, Shanghai), the fourth IMF-FRBA China Workshop (2019, Atlanta Fed), the Midwest Macro Meetings (2019, UGA), Nanjing University, the SED Meetings (2019, St. Louis), and the sixth International Annual Conference of New Structural Economics (2019, Peking University). The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lei Fang, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309; or Berthold Herrendorf, Department of Economics, WP Carey School of Business, Arizona State University, 501 E. Orange St., Tempe, AZ 85287-9801.

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