Human Capital and Growth in a Services Economy: the Case of Portugal

The persistence of relative low aggregate income and productivity levels and performance in Portugal might be linked to the strong weight of services, and especially traditional stagnant personal services, which have fewer opportunities for enhancing its productivity. The so-called modern progressive services, such as financial and business services and communications, on the other hand, have registered higher labor productivity levels, since they are more receptive to the use of information technologies and are increasingly tradable across borders. However, these services sub-sectors demand higher levels of human capital and so the relatively low educational levels of the Portuguese workforce might have prevented Portugal from capitalizing on the opportunities provided by modern services growth and continue to do so in the future. In order to shed some light on these interactions we investigate the existence of causality among sectoral productivity, services sector expansion, human capital, and aggregate productivity over the period 1970-2006 in the Portuguese economy. The evidence suggests bi-directional causality only between sectoral and aggregate productivity, with sectoral employment shares and human capital not revealing themselves as relevant for the explanation of the other variables nor being influenced by them. Across services sub-sectors, community social and personal services seem to be the most influential sector, making a positive and lasting contribution to aggregate productivity, and this seems to be the reason why, at a higher level of aggregation, non-market services appear thus as positive contributor to aggregate productivity, while market services have no influence.