| Abstract: | This paper aims to explain why and how the service sector may grow faster than manufacturing. It develops a two‐sector, closed‐economy model, having a manufacturing sector and a service sector. Accumulation of human capital serves as the basis of growth. The analysis focuses on business services, while household services are also considered. It is argued that differences in returns to scale between the two sectors and employment frictions in manufacturing explain why the growth rate of the service sector may be higher. The model also features that within the service sector the business services sub‐sector may grow faster than household services. |
