Job creation in business services : innovation, demand, polarisation.
Date: 2015-07-27
Institutions: Institute for Prospective Technological Studies
Subjects: industrial policy, industrial research, innovation, job creation, research and development, research report, service industry

IPTS WORKING PAPER on  
CORPORATE R&D AND INNOVATION - No. 04/2011 

Job creation in business services: 
innovation, demand, polarisation 

Francesco Bogliacino, Matteo Lucchese and Mario Pianta 

August 2011 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

The IPTS Working Papers on Corporate R&D and Innovation address economic and policy questions 
related  to industrial research and innovation and  their contribution  to European  competitiveness. Mainly 
aimed  at  policy  analysts  and  the  academic  community,  these  are  scientific  papers  (relevant  to  and 
highlighting possible policy implications) and proper scientific publications which are typically issued when 
submitted  to  peer-reviewed  scientific  journals.  The  working  papers  are  useful  for  communicating  our 
preliminary  research  findings  to  a  wide  audience,  to  promote  discussion  and  feedback  aimed  at  further 
improvements. They are considered works in progress and are subject to revision. 
These IPTS Working Papers on Corporate R&D and Innovation can take the form of more policy-oriented 
notes,  mainly  addressed  towards  EU  policy-makers.  They present policy  implications derived from  our 
own research and the views of the most prominent authors in the field, with appropriate references.    
This Working Paper (No. 04/2011 – [August 2011]) is issued in the context of the Industrial Research 
Monitoring  and  Analysis  (IRMA)1  activities  that  are  jointly  carried  out  by  the  European  Commission's 
Joint Research Centre (JRC) – Institute for Prospective Technological Studies (IPTS) and the Directorate 
General for Research - Directorate C, European Research Area: Knowledge-based economy. 
IRMA  activities  aim  to  improve  the  understanding  of  industrial  R&D  and  Innovation  in  the  EU  and  to 
identify medium and long-term policy implications. More information, including activities and publications, 
is available at: http://iri.jrc.es/ and http://ec.europa.eu/invest-in-research/ 

The  main  authors  of  this  paper  are  Francesco  Bogliacino  (European  Commission,  Joint  Research 
Center-  Institute  for  Perspective  Technological  Studies,  Seville;  Rise  Group,  Medellin),  Matteo 
Lucchese  (University  of  Urbino)  and  Mario  Pianta  (University  of  Urbino).  This  paper  builds  on  a 
presentation given at the workshop “Business services for innovation, internationalisation and growth”, 
held  at  the  University  of  Rome  La  Sapienza,  2-3  December  2010.  We  would  like  to  thank  Rinaldo 
Evangelista,  Valentina  Meliciani  and  the  participants  for  their  comments.  We  also  appreciate  the 
comments  and  suggestions  of  three  anonymous  referees.  The  analysis  conducted  in  the  paper  has 
been developed in the context of the SID database update, reference to contract 151834-2010A08-IT 
by the European Commission JRC.  

The  IPTS  Working  Papers  on  Corporate  R&D  and  Innovation  are  published  under  the  editorial 
responsibility  of  Fernando  Hervás,  Pietro  Moncada-Paternò-Castello  and  Andries  Brandsma  at  the 
Knowledge  for  Growth  Unit  –  Economics  of  Industrial  Research  and  Innovation  Action  of  IPTS/Joint 
Research  Centre  of  the  European  Commission,  Michele  Cincera  of  the  Solvay  Brussels  School  of 
Economics and  Management,  Université  Libre  de  Bruxelles, and Enrico  Santarelli of  the  University of 
Bologna.  

Contact information: F. Hervás 
European Commission, Joint Research Centre - Institute for Prospective Technological Studies 
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DG RTD-C website: http://ec.europa.eu/invest-in-research/monitoring/analyses01_en.htm 

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Neither the European Commission nor any person acting on behalf of the Commission 
is responsible for any use made of this publication. 

IPTS WORKING PAPER on CORPORATE R&D AND INNOVATION - No. 04/2011 
Full electronic version of the paper can be downloaded at http://iri.jrc.es/ 
JRC 66487 
EUR 24747 EN/4 
ISBN 978-92-79-21146-1 
ISSN 1831-9408 
ISSN 1831-9424 
doi:10.2791/63330 
Luxembourg: Publications Office of the European Union, 2011 
© European Union, 2011 
Reproduction is authorised provided the source is acknowledged 
Printed in Spain 

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IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

Abstract 

The  patterns  and  mechanisms  of  job  creation  in  business  services  are  investigated  in  this 
article  by  considering  the  role  of  innovation,  demand,  wages  and  the  composition  of 
employment by professional groups. A model is developed and an empirical test is carried out 
with  parallel  analyses  on  a  group  of  selected  business  services,  on  other  services  and  on 
manufacturing sectors, considering six major European countries over the period 1996-2007. 

Within  technological  activities,  a  distinction  is  made  between  those  supporting  either 
technological  competitiveness,  or  cost  competitiveness.  Demand  variables  allow  identifying 
the special role of intermediate demand. 

Job  creation  in  business  services  appears  to  be  driven  by  efforts  to  expand  technological 
competitiveness and by the fast growing intermediate demand coming from other industries; 
conversely, process innovation leads to job losses and wage growth has a negative effect that 
is  lower  than  in  other  industries.  Business  services  show  an  increasingly  polarised 
employment structure. 

JEL Classification: J20, J23, O30, O33 

Keywords: Business Services, Innovation, Employment 

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JOB CREATION IN BUSINESS SERVICES 

1  Introduction 

In  recent  decades  a  number  of  service  industries  closely  linked  to  business  activities  in  the 

rest  of  the  economy  –  business  services  –  have  shown  a  strong  dynamism  in  terms  of 

innovation and employment growth; they create and diffuse knowledge, are extensive users of 

ICTs and have a strong impact on the activity of manufacturing and other services; in this way 

they are emerging as potential drivers of economic growth and job creation. 

A large literature has recently emerged on the importance and potential of business services 

in advanced economies, emphasising the outsourcing of activities from manufacturing and the 

rise  of  knowledge-based  activities  with  a  potential  for  spreading  innovations  across  all  the 

economy (see, among others, Kox, 2001; Miles, 2007). 

From a European policy perspective, the growing interconnections between business services 

and manufacturing require a deep analysis of dynamics of these industries, in order to achieve 
a better calibration of industrial policies.1 

In this article we identify the subset of service industries that share the above characteristics 

and  contrast  them  with  other  services  and  manufacturing  sectors,  focusing  on  six  major 

European countries - Germany, France, Italy, The Netherlands, Spain and the UK - over the 

period  1996-2007.  After  considering  the  patterns  of  growth  for  value  added,  employment, 

productivity, innovative activities and qualification of jobs in terms of professional categories, 

we  identify  the  following  industries  as  business  services:  Post  and  Telecommunications 

(NACE Division 64), Renting of Machinery and Equipment (NACE Division 71), Computer and 

Related  Activities  (NACE  Division  72),  Research  and  Development  (NACE  Division  73),  and 

Other Business Activities (NACE Division 74). 

While  some  heterogeneity  exists  within  this  group,  they  systematically  outperform  other 

services and manufacturing sectors in the aspects listed above (as will be shown in section 3) 

and share a key role as providers of high-value inputs to the rest of the economy (on this role, 

see Evangelista, Lucchese and Meliciani, 2011). In the six countries we investigate, this group 

of  business  services  accounts  for  14%  of  value  added  and  15%  of  employees  in  2007,  but 

their employment growth has been much faster than that for the whole economy. 

Financial  services,  banking  and  insurance  are  omitted  from  this  definition  because  their 

growth has been highly dependent - especially in some countries - on speculative bubbles that 

have  led  to  the  2008  crises  and  job  creation  has  been  illusory.  Moreover,  their  innovative 

stance has been more limited and restructuring practices were significant well before the crisis 

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exploded.  We  consider  these  industries  in  the  aggregate  of  ‘other  services’  as  a  term  of 

comparison alongside manufacturing, for the performances of business services. 

The  key  question  we  address  in  this  article  is  why  have  business  services  been  able  to 

achieve such results in terms of job creation? What are the mechanisms that have supported 

such performances? And how do they differ from the mechanisms operating in other services 

and manufacturing? 

The literature on structural change provides us with a strong perspective for investigating such 

patterns.  We  can  expect  technological  change  on  the  supply  side  and  its  growth  on  the 

demand side to be two major forces driving the business services’ growth (Pasinetti, 1993). 

We  develop  a  model  and  carry  out  empirical  tests  that  build  on  this  approach,  but  also 

consider important novelties from different streams of research. First, from innovation studies, 

we  adopt 

the  distinction  between 

innovative  efforts  aimed  either  at 

technological 

competitiveness,  based  on  innovation  in  products  and  markets,  or  at  cost  competitiveness, 

relying  on  supplier-driven  process  innovations  (Pianta,  2001).  These  strategies  represent 

different technological trajectories that help explain the evolution of different industry groups. 

A large literature has shown that these strategies have contrasting effects on employment at 

the industry level, with the former supporting job creation and the latter leading to job losses 

(Pianta, 2005; Mastrostefano and Pianta, 2009; Bogliacino and Pianta, 2010).  

Second,  the  demand  side  is  considered;  the  relationship  between  demand,  productivity  and 

employment  has  mainly  been  studied  for  manufacturing  industries  and  we  are  careful  to 

consider both intermediate and final demand, and both domestic and foreign sources, in order 

to  identify  the  key  factors  supporting  employment  growth.  We  have  taken  these  data  from 

Input-Output  tables  and  especially  examine  business  services’  role  in  providing  advanced 

inputs to other industries. 

In  fact,  intermediate  demand  has  been  the  fastest  growing  element  of  demand  in  European 

countries,  reflecting  an  economic  structure  that  has  become  less  vertically  integrated  and 

more interdependent across sectors; business services have played a key role in this process. 

Moreover,  the  trade  of  intermediate  goods  has  contributed  to  higher  internationalisation, 

leading to production outsourcing and offshoring. In some service sectors internationalisation 

is  low,  foreign  demand  is  modest  and  domestic  markets  remain  crucial;  the  result  has  often 

been  a  low  degree  of  competition  and  lower  productivity  growth.  Our  analysis  will clarify  the 

position of business services within this complex dynamics. 

1  The  relationship  between  manufacturing  and  associated  services  is  quoted  in  the  Industrial  Policy 
flagship of Europe 2020 strategy, such as the role played by ICT and technology along the value 
chain. 

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Third, from labour market studies we consider the relevance of wage growth in order to test 

whether  job  creation  in  business  services  is  affected  by  the  ‘neoclassical’  trade  off  between 

wage and employment growth. 

Fourth,  we  control  for  the  market  structure,  using  both  a  proxy  of  concentration  (Herfindahl 

index)  and  the  average  firm  size  in  the  sector,  in  order  to  account  for  both  competitive 

pressure and industry evolution dynamics (entry patterns, etc.).  

Finally,  given  that  recent  literature  has  emphasised  the  quality,  and  not  just  the  quantity,  of 

employment, we consider the way employment is composed in terms of professional groups 

as important and examine events that have occurred in business services, comparing them to 

other  services  and  manufacturing.  In  particular,  we  used  data  on  the  shares  of  four  major 

professional  groups  –  managers  and  professionals;  clerks;  craft  workers;  manual  workers  - 

and investigate the occupational structure’s growing polarisation, with net job creation mainly 

in the top and bottom groups (Nascia and Pianta, 2008). 

Different models are proposed in order to explain the driving forces of employment change in 

business services and other industry groups, highlighting mechanisms linked to technological 

strategies, demand dynamics and labour markets. 

Empirical work and econometric tests are based on the database developed at the University 

of  Urbino,  the  Sectoral  Innovation  Database  (SID)  (Lucchese  and  Pianta,  2011)  which 

provides  a  broad  description  of  different  dimensions  of  industry  activities.  It  integrates 

innovation data from EUROSTAT Community Innovation Surveys (CIS) with a large number of 

indicators on economic and demand variables from the OECD STAN database and the OECD 

Input-Output Tables. The SID dataset covers 22 manufacturing sectors and 17 service sectors 

-  NACE  REV.1  subsections  -  for  six  European  countries  -  Germany,  France,  Italy,  The 

Netherlands,  Spain  and  the  UK,  which  represent  around  80%  of  the  EU-12’s  value  added 

during the two decades under consideration. 

The  paper  is  organised  as  follows:  Section  2  reviews  the  existing  literature  on  business 

services and employment; Section 3 offers a descriptive analysis on the dynamics of business 

services  and  their  employment  structure,  considering  the  role  of  innovation  and  demand; 

Section 4 presents the model and the econometric strategy; Section 5 shows the results; and 

Section 6 provides a conclusion. 

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2  Literature review 

2.1. The growth of business services 

In the last decades, the weight of business services in the economy has rapidly grown. Many 

studies  have  analysed  the  determinants,  with  different  levels  of  analysis  pointing  out  the 

diversified patterns across time and countries. 

Kox  (2001),  Kox  and  Rubalcaba  (2007)  and  Miles  (2007)  offer  an  exhaustive  description  of 

channels  through  which  business  services  have  risen  in  the  last  decades  both  in  terms  of 

value added and employment growth. Their rise is related to activity outsourcing, which were 

previously  carried  out  within  manufacturing  firms.  In  this  case,  job  creation  and  value-added 

growth in the business services industry have replaced the drop in manufacturing production. 

As  business  services  emerge  as  independent  activities,  their  innovative  potential  becomes 

stronger,  supported  by  a  high  level  of  interaction  between  upstream  and  downstream  firms: 

business  services  supply  ‘intangible  assets’  that  contribute  to  specialising  productive 

processes.  The  use  of  these  inputs  imply  a  “different  way  of  organising  social  production, 

allowing a better spread of the advantages of knowledge specialisation, more external scale 
economies,  and  a  higher-level  growth  path”.2  In  this  way,  the  nature  of  the  intermediate 

relationships  between  firms  seems  to  have  changed,  supporting  the  possible  expansion  of 

value added. 

Through the use of Input-Output Tables, some exercises of decomposition have documented 

the importance of the role of other sectors’ intermediate demand in business-service growth. 

Other  studies  have  emphasised  the  rise  of  final  demand,  showing  a  further  evolution  of 

relationships between services and end users. In the 1990s, the growth of business services 

was also related to deregulation and privatisation of economic activities, which led to the rise 

of  private  specialised  suppliers,  replacing  activities  formerly  carried  out  by  the  public  sector 

(Kox, 2001; Pilat and Wölfl, 2005; Savona and Lorentz, 2006). 

In general, the strong growth of employment in business services has often been considered a 

by-product  of  the  scarce  productivity  performances  of  these  sectors.  ‘Baumol’s  disease’ 

(Baumol, 1957) argues that the shift in employment from manufacturing to services is due to 

the  structural  productivity  differential  between  the  two  sectors.  While  some  studies  have 

2 Kox and Rubalcaba (2007). 

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JOB CREATION IN BUSINESS SERVICES 

shown that these dynamics are dependent on country and sectoral conditions (Baker, 2007), 

‘Baumol’s disease’ is involved by an increasing weight of services which could reduce overall 

economic system growth.  

The specificity of business services – which often have higher productivity performances than 

‘traditional'  services  –  has  been  pointed  out.  A  major  factor  here  is  the  importance  of 

knowledge and innovation in business services, often related to the application and diffusion 

of ICTs; the provision of business services and the vast knowledge externalities that originate 

from the sector may contribute to better performances in the whole economy. These aspects 

and the diffusion of knowledge through the relationships that are established among industries 

have been documented extensively in the literature (Antonelli, 1999; Camacho and Rodriguez, 

2007; Evangelista et al., 2011 in this special issue). 

2.2. Innovation, demand, professions and employment 

The literature reviewed above explains employment growth in business services as a result of 

the  structural  change  in  advanced  economies.  However,  the  importance  of  knowledge  and 

innovation as a source of job creation in this emerging industry requires consideration for the 

role  that  innovation  plays  in  affecting  employment.  Deeply  discussed  since  the  Classical 

Economics  era,  the  relationship  between  technological  change  and  employment  has 

traditionally been empirically investigated only considering the manufacturing industry, starting 

with  the  pioneering  works  of  Freeman,  Clark,  and  Soete  (1982)  and  Freeman  and  Soete, 
(1987, 1994).3 

Studies  focusing  on  the  firm  level  have  generally  found  a  positive  relationship  between 

innovation  and  job  creation  (see  for  instance  Van  Reenen,  1997;  Piva  and  Vivarelli,  2005; 

Piva, Santarelli and Vivarelli, 2005; Evangelista and Savona, 2003; Mansury and Love, 2008). 

Greenan and Guellec (2000) however find that the positive employment impact of product and 

process innovation at the firm level disappears at industry level (where only new products lead 

to new jobs). 

In fact, innovative firms face no demand constraint and when they are more efficient – through 

either new products or processes – they can expand output and jobs also at the expense of 

competitors.  Conversely,  at  the  industry  level  the  overall  potential  for  job  creation  is 

constrained by increasing industry demand and by the dynamics of labour productivity.  

Building  on  the  Schumpeterian  distinction  between  product  and  process  innovation,  Pianta 

3 Surveys of current literature - with different perspectives and coverage - are in Addison and Teixeira, 
2001;  Acemoglu,  2002;  Chennells  and  Van  Reenen,  2002;  Spiezia  and  Vivarelli,  2002;  and  Pianta, 

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(2001)  has  proposed  a  distinction  between 

the  strategies  of 

technological  or  cost 

competitiveness  and  has  suggested  the  need  to  consider  demand  factors  for  explaining 

employment outcomes. Such a distinction identifies the predominant orientation of sectors in 

terms  of  the  nature  of  the  innovative  efforts  produced.  The  strategy  of  technological 

competitiveness  is  associated  with  a  general  tendency  to  internal  innovative  activity,  a 

prevalence  of  product  innovations  and  a  propensity  to  search  for  new  markets;  the  cost 

competitiveness  strategy  is  related  to  a  prevalence  of  concerns  about  cost  efficiency  and 

labour  saving  process  innovations.  This  distinction  is  based  on  the  idea  that  the  economic 

sectors are characterised by a different technological trajectory that shapes the perspective of 

sectors’  growth.  In  fact,  it  is  the  unfolding  of  these  trajectories  that  brings  about  a  variety  in 

growth  performance  of  sectors  and,  as  a  consequence,  a  continuous  change  in  economies’ 

internal  structure.  This  approach  has  been  integrated  with  the  consideration  of  demand 

factors, in order to account for the need of ‘demand-pull’ effects for creating the conditions for 

achieving innovations’ potential and supporting job creation. 

Following this approach, the technology-employment link has been investigated at the industry 

level  by  studies  that  have  extensively  used  evidence  from  innovation  surveys.  Vivarelli, 

Evangelista  and  Pianta  (1996)  and  Pianta  (2000,  2001)  examined  the  weak  European  job 

performance in the 1990s, showing it to be related to low levels of product innovation, stable 

wages  and  low-demand  dynamics.  Similar  results  are  found  in  Antonucci  and  Pianta  (2002) 

and Evangelista and Savona (2003); the latter study focuses on the employment patterns in 

service industries in Italy, where job creation occurs mainly in small, technology-driven firms. 

Mastrostefano and Pianta (2009) examine the effects on employment that result from different 

types  of  innovation,  labour  market  factors,  and demand  dynamics.  When  the  analysis  of  the 

impact  of  innovation  on  job  creation  is  studied  in  the  long-term,  the  ‘neoclassical’  negative 

relationship  between  wage  and 

job  growth  seems 

to  be 

less  relevant,  while 

the 

‘Schumpeterian’ job creating effect on innovation’s market impact emerges as a major factor. 

This research has been extended to services in Bogliacino and Pianta’s study (2010), where 

the relationship between technological regimes and patterns of employment growth is studied 

through  the  introduction  of  a  Revised  Pavitt  Taxonomy.  The  latter  is  able  to  describe  the 

different  technological  opportunities  of  manufacturing  as  well  as  service  sectors.  Again,  the 

results show that product innovation has a positive impact on employment in Science-Based 

and  Specialised  Suppliers  sectors  –  both  in  manufacturing  and  in  services  –  while  labour-

saving effects prevail in the case of sectors more oriented towards process innovation (Scale 

and Information Intensive and Suppliers Dominated sectors). In identifying the mechanisms of 

job  creation,  the  general  distinction  between  manufacturing  and  services  appears  less 

2005. 

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relevant than the specificity of each Revised Pavitt class. 

Other  studies  have  focused  on  the  role  of  demand  in  supporting  technological  change  and 

performances, showing its crucial role in creating the conditions for growth (Crespi and Pianta, 

2008; Bogliacino and Pianta, 2008 and 2011).  

Finally, a growing literature has addressed changes in the relative composition of employment 

by professional skills (Acemoglu, 2002). The dominant interpretation is that the emergence of 

new  technologies  has  led  to  a  pattern  of  skill-biased  technological  change  as  innovations 

replace unskilled labour with workers with higher competences, which are complementary to 

the  new  technologies.  Job  opportunities  for  blue  collar  workers  in  the  labour  market  worsen 

and the resulting inequality is presented as a ‘natural’ effect of technological change. 

More recent studies focused on the ability of computers to replace routine-task workers, while 

activities  such  as  decision  making  (by  managers)  and  menial  jobs  (such  as  cleaning,  by  the 

least-skilled workers) cannot be automated. The outcome is a polarised employment structure 

where the share of middle skills is falling (Autor et al., 2003; Autor et al., 2006; Autor and Dorn, 

2010; Moose and Manning, 2007). 

A more detailed investigation has used data on employees by professional qualifications in 36 

manufacturing  and  service  industries  for  five  EU  countries,  considering  four  professional 

groups: Managers, Clerks, Craft workers and Manual workers (Nascia and Pianta, 2008). 

Distinct patterns emerge when industries are grouped based on their patterns of technological 

change, 

i.e. 

technological  competitiveness 

in  high 

innovation 

industries  and  cost 

competitiveness  in  traditional  sectors.  The  overall  skill  intensity  is  substantially  higher  in  the 

former  industry  group,  and  from  2000  to  2003  a  clear  employment  polarisation  pattern 

emerged,  with  more  jobs  being  created  for  managers  (+2%  a  year)  and  manual  workers 

(+1.2%) and job losses for clerks (-0.2%) and skilled workers (-2%). Rather than a linear shift 

from low-skilled jobs to high-skilled, white collar employment, as predicted by the skill-biased 

hypothesis,  a  clear  polarisation  pattern  is  found.  When  the  determinants  of  employment 

changes  are  explored  separately  in  the  four  professional  groups,  different  relationships 

emerge. Product innovation and higher education lead to more jobs for high-skill categories; 

process innovation and cost-reduction strategies destroy jobs for craft workers (ibid.). 

Four main lessons can be drawn from such different streams of literature. First, the industry 

level  is  particularly  appropriate  to  investigate  the  innovation-employment  link  as  it  is  able  to 

take  into  account  the  overall  patterns  of  structural  change  and  the  demand  constraint  that 

operates  for  industries.  Second,  there  is  a  need  to  break  down  technological  change  into 

different strategies – technological vs. cost competitiveness – which have contrasting effects 

on  employment.  Third,  the  very  relationships  defined  by  models  need  be  adapted  to  the 

specificities of industry groups characterised either by different technological trajectories or by 

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the particular nature of business services. Fourth, the quality of jobs has to be taken on board 

in  the  analysis,  with  attention  to  the  professions  and  skills  present  in  jobs  created  and  lost. 

The approach we will follow herein will be based on these lessons from recent literature.. 

3  Empirical evidence 

Job creation in services is not uniform. If we examine employment growth from 1996 to 2007 

in  the  six  major  European  economies  (Germany,  France,  UK,  Italy,  Spain  and  The 

Netherlands) a substantial divide emerges between traditional and business-service activities. 

In Graph 3.1., services are grouped by Trade and Leisure (NACE Divisions 50-55), Transport 

and  Storage  (NACE  Divisions  60-63),  Finance,  Insurance  and  Real  Estate  (NACE  Divisions 

65-70) and Business Services (NACE Divisions 64, 71-74): the latter grow twice as much as 

other services do, while the rising weight of finance in the economy is not matched by a rapid 

growth  in  employment.  The  variability  within  macro  sectors  is  however  not  negligible:  in 

business  services,  Post  and  Telecommunications  have  experienced  void  employment 

dynamics,  while  Computer  and  Related  Activities  grew  7%  per  year  on  average  among  the 

countries  considered.  Other  Business  Activities  (NACE  Division  74),  which  represents  more 

than half of employment of all business services, grew 5%. 

This pattern looks stable among the countries: business services show higher dynamics than 

overall services; the gap is marked for Germany, where their growth is twice as much as the 

growth in the whole service sector. The higher services’ growth rates as a whole in Spain and 

Italy  are  associated  to  the  late  development  of  the  tertiarisation  process.  A  more  detailed 

picture for each service industry is provided in the Appendix. 

Graph 3.1. Compound annual rates of employment growth from 1996 to 2007. Averages 

among countries and sectors. 

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Source: SID database 

Graph  3.2.  explores  the  employment  dynamics  from  1996  to  2007,  considering  the  trend  of 

the  manufacturing  sector,  overall  services  and  business  services.  Their  dynamics  appear  to 

be  similar,  although  the  performance  of  manufacturing  is  strickingly  lower  than  that  of 

services:  from  2000  to  2007,  the  European  manufacturing  system  has  destroyed  a  large 

quantity  of  jobs,  replaced  by  a  recovery  in  service  and  (especially)  business  services 

industries. The latter have strongly suffered the economic crisis from 2000 to 2003 and have 

not returned to rapid growth until 2007. 

Graph 3.2. Annual rates of employment growth. Average values among countries. 

Source: SID database 

Looking  at  Graph  3.2.,  three  phases  of  development  can  be  identified:  from  1996  to  2000 

there is a strong employment growth in services, pushed by job creation in business services; 

from 2000 to 2003 the destruction of employment in manufacturing is not counterbalanced by 

a growth of employment in services; from 2003 to 2007 manufacturing reduces its job losses 

and  a  strong  divergence  emerges  in  the  formation  of  employment  between  traditional  and 

business  services.  The  dynamics  of  business  services  seem  to  be  more  subject  to  the 

economic  cycle  than  other  services,  as  Kox  and  Rubalcaba  (2007)  have  suggested:  this 

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JOB CREATION IN BUSINESS SERVICES 

seems  to  be  due  to  the  high  integration  of  business  services  with  the  manufacturing  sector 

and to a high level of labour flexibility. 

The different growth of services brings about a change in the qualitative development of jobs 
offered.4 Many studies have in fact focused on a change in the composition of skills required 

following the structural change process. 

Look  at  the  composition  of  employment  by  professions  (Graph  3.3.)  in  2000.  Manufacturing 

and  services  are  characterised  by  a  different  composition:  services  are  marked  by  a  higher 

share of Managers and Clerks while Craft and Manual workers constitute the greater part of 

manufacturing employment. Educational levels distribution is obviously related to differences 

in  professions.  A  general  process  of  up-skilling  is  present  in  all  sectors,  although  the 

differences  between  manufacturing  and  services  seem  to  be  less  relevant.  Additional 

evidence on the employment change rates in each of the four professional groups is provided 

in the Appendix. 

Graph  3.3.  Composition  of  employment  in  2000  by  professions  and  by  education. 

Averages across countries. 

Source: SID database 

4 Due to the availability of data for professions and educations, five countries are considered here (The 
Netherlands are excluded) for a reduced period of time, from 2000 to 2003. Professions are grouped by 
Managers  and  professionals,  Clerks,  Craft  Workers  and  Manual  Workers  (based  on  the  International 
Standard  Classification  of  Occupations  ISCO88  COM  nomenclature  at  one  digit  level).  Educational 
levels  are  classified  by  university,  secondary  and  primary  education  (according  to  the  ISCED 
nomenclature at one digit level). 

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Besides these patterns concerning the quantity and quality of employment, it is also important 

to consider how demand evolves. Business services are strongly dependent on intermediate 

demand,  while  other  services  rely  on  final  consumption  and  manufacturing  industry  shows 

equal share of intermediate demand and exports. The evidence is provided in Graph A3 in the 

Appendix. These different demand patterns have important consequences on our explanation 

of  employment  growth  determinants  in  business  services  as  opposed  to  the  rest  of  the 

economy. 

4  The model and econometric strategy 

This  section  explores  the  factors  contributing  to  job  creation  in  Europe,  linking  supply  and 

demand factors. The potential for job growth can be reduced by the occurrence of restrictive 

conditions on demand which sharpen the results of the technological competition among firms 

and sectors. Through the information drawn from the Input/Output Tables from OECD, we can 

break down the different demand components and study their impact on employment growth. 

The  innovative  activity  of  sectors  is investigated  by  considering  the  dominance  of a  strategy 

based  on  technological  and  cost  competitiveness  (Pianta,  2001).  These  strategies  are 

supposed  to  have  contrasting  effects  on  employment.  On  the  one  hand,  technological 

competitiveness, rooted in quality advantages and the introduction of new products, opens up 

new  opportunities  for  demand  and  employment  growth,  although  this  effect  can  be 

counterbalanced  by  the  formation  of  monopoly  rents  that  can  reduce  the  creation  of  value 

added.  On  the  other  hand,  cost  competitiveness,  based  on  process  innovation,  engenders 

productivity  improvements  which  are  largely  due  to  job  losses.  A  positive  effect  on 

employment  can  also  result  from  reduced  prices  that  can  stimulate  new  demand.  However, 

the  prevailing  of  the  first  strategy  over  the  latter  is  generally  supposed  to  provide  higher  job 

creation opportunities. 

Employment growth is also dependent on the dynamics of demand. When its composition is 

considered  (household  and  intermediate  consumption,  investments,  and  exports),  different 

competitive  regimes  are  acknowledged.  The  manufacturing  sector  is  associated  with  a  strict 

international competition which asks for a continuous search for higher levels of productivity in 

order  to  sustain  exports  growth.  Service  sectors  are  related  to  internal  demand  and  to  the 

process  of  rising  fragmentation  of  production  where  competitive  pressure  is  obviously 

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reduced. 

Interestingly, the Sectoral Innovation Database links all of these factors in a single framework. 

4.1. Methodology 

The following equation is estimated: 

emp
it

=

tc
αα
+
1
it

0

+

α
2

cc
it

+

α
3

d

it

+

α
4

w
it

+

u

it

(1) 

where emp is the sector’s employment level, tc represents the accumulated knowledge related 

with technological competitiveness strategy, cc is cost competitiveness, d is demand and w is 

the wage; i and t stands for industry and time, respectively. The model is estimated at industry 

level for various countries so the individual observation is a certain industry in a given country.  

Our main object is to identify the effect of technology and demand. A typical issue is that the 

error term u may be correlated with the regressors, because of time-invariant effects or issues 

of simultaneity and/or omitted variables. 

If we think of variables in the log scale, we know that by taking the differences we approximate 

the  rate  of  change.  Through  this  transformation  we  eliminate  the  individual  time-invariant 

effect  (we  also  control  for  all time-invariant  characteristics, such  as  country-level  institutional 

determinants  which  are  likely  to  play  a  role)  and  we  can  exploit  the  lag  structure  to  avoid 

simultaneity. 

Technically, we take long differences (e.g. Caroli and Van Reenen, 2001; Piva et al., 2005), 

i.e.  differences  over  a  large  time  span,  in  order  to  soften  considerably  the  autoregressive 

pattern, which would weaken the validity of the lags. As the log difference approximates the 

rate of variation, making the average is just a linear transformation of it (not affecting the main 

estimators’  properties),  we  calculate  average  rate  of  change  which  allows  us  to  merge  the 

different data sources, which have slightly different time spans.  

The model is adjusted for heteroscedasticity (robust estimation) and intra-group correlation at 

the industry level, checking for intra-sectoral heterogeneity.  

Moreover,  weighted  regressions  are  used  since  industry  data  are  typically  grouped  data  of 

unequal size; this provides us with more time-wise stability.  

The baseline model becomes: 

∆

emp
it

α
∆=
1

tc
it

+

α
2

∆

cc
it

+

α
3

d
∆

it

+

α
4

∆

w
it

u
∆+

it

(2) 

where  the  dependent  variable  is  the  rate  of  growth  of  employment,  the  variation  in  the 

knowledge  stock  associated  with  the  technological  strategies  can  be  proxied  by  flows 

15

 
 
 
 
 
 
 
  
 
 
 
 
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JOB CREATION IN BUSINESS SERVICES 

variables  coming  from  innovation  surveys,  demand  growth  is  measured  through  the  growth 

rate of different sources of demand, w is the growth rate of labour compensation per employee 

and the last part is the error term, in which the individual time-invariant effects are eliminated.  

Following our conceptual framework, we expect the following relationships to emerge: 

1) Proxies for technological competitiveness (the share of firms indicating clients as source of 

innovation and the share of firms internal source as determinants for innovation) are expected 

to  have  a  positive  effect  on  job  growth.  Employment  growth  is  stimulated  by  the  greater 

demand for new products; the positive effect of the new demand is supposed to prevail on the 

effects of reduced production due to forming possible monopoly rents in the consumer market 

and/or replacing effects for old products; 

2) Indicators of cost competitiveness (the share of firms aiming to reduce labour costs and the 

share  of  firms  who  indicate  suppliers  as  source  of  innovation)  are  expected  to  have  direct 

labour saving effects. The effect on prices due to increased productivity can however partially 

or  totally  overcome  the  reduced  employment  that  derives  from  recourse  to  a  strategy  based 

on process innovations. 

3)  Demand  variables  are  expected  to  have  a  positive  effect  on  employment;  however,  while 

exports  are  supposed  to  drive  productivity  and  employment  growth  in  manufacturing, 

employment growth in services is prevalently associated with the growth of intermediate and 

household  consumption.  In  sectors  where  the  role  of  new  information  technologies  is  more 

intensive and a sustained growth in terms of value added can be observed, economic growth 

is  principally  linked  to  changes  in  the  production  structure  that  leads  to  high  intermediate 

demand  from  the  rest  of  the  economy:  70%  of  business-service  demand  only  comes  from 

other sectors. 

In  terms  of  control  variables,  we  expect  an  inverse  relationship  between  wages  (labour 

compensation  growth  rate  per  employee)  and  employment  creation.  Labour  demand  can 

increase when labour costs decrease. 

We  also  ran  further  robustness  checks  to  control  for  the  market  structure  of  industries;  we 

expect  concentration  to  be  negatively  related  with  growth,  through  a  standard  lack  of 

competitive pressure effect. We also add a control for the firm’s average size in the sector: we 

expect it to be negatively correlated with growth for the most dynamic industries, where jobs 

are disproportionately created by new (and usually very small) firms (Haltiwanger et al., 2010). 

4.2. Data 

The analysis considers six countries, Germany, France, Italy, The Netherlands, Spain and the 

United Kingdom for 21 manufacturing and 17 service sectors. 

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The  model  is  distinctly  examined  for  manufacturing  and  services  sector.  In  order  to 

differentiate the dynamics of services, we isolate the effects of business services from other 

services. Industries classified as 64 and 71 to 74 by NACE Rev. 1.1 form the first category, 

while industries 50, 51, 52, 55, 63, and 65 to 67 are classified as other services. Whenever we 

want to separate the effects among groups of industries we run the regressions on the overall 

database  but  allowing for  different coefficients.  Although  the  estimates  are  exactly  the  same 

as  those  obtained  from  regressions  over  the  different  groups  of  observations,  the  estimates 

are more efficient if we use the overall sample, given the number of the degrees of freedom.  

We  believe  the  time  structure  deserves  a  specific  comment.  We  merge  three  different  data 

sources  (STAN  OECD  database  for  employment  growth,  OECD  I-O  Tables  for  demand 

variables  and  CIS  data  for  innovation  measures).  Having  three  waves  of  Input/Output 

available  (1995,  2000  and  2005)  allowed  us  to  consider  the  demand  growth  rates  for  two 

periods,  1995-2000  and  2000-2005.  In  fact,  the  employment  trend  described  in  Section  3 

suggests that business cycle impact should remain in the data. We decided not to include the 

2001-2003  recession  and  focus  on  two  periods  of  employment  growth.  We  excluded  CIS3 

data  and  focused  on  the  impact  of  innovation  variables  in  CIS2  and  CIS4  on  employment 

performance  in  1996-2000  and  2003-2007  (in  order  to  consider  a  lag  in  the  impact  of 

innovation). 

The temporal structure is shown in the following table: 

Table 1. The database structure 

Type of variable 

Reference years  

Period 1                               Period 2 

Innovation activities 

CIS2, 1994-1996 

CIS4, 2002-2004 

Employment growth (growth rates) 

Industries’ demand (growth rates) 

Wage 

1996-2000 

1995-2000 

1996-2000 

2003-2007 

2000-2005 

2003-2007 

As  we  can  see,  data  from  Innovation  surveys  always  precede  data  on  employment;  with 

regards  to  demand,  data  for  the  first  time  started  one  year  before,  and  data  for  the  second 

period finished two years before. 

As a further check, the possibility of multicollinearity is checked through the Variance-Inflation-

Factor  (VIF)  analysis.  A  preliminary  analysis  on  the  distribution  of  variables  has  allowed 

possible extreme values to be dropped. Moreover, only the significant differences of variables 

are  considered.  The  presence  of  outliers  does  not  affect  the  values  of  coefficients  in  every 

model. 

The  technological  proxies  extracted  from  the  extensive  information  in  CIS  are  chosen 

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depending  on  availability  (in  order  to  avoid  gaps  in  the  dataset,  especially  with  regards  to 

service industries) and low number of outliers. 

5  Results 

5.1. Baseline regressions 

First, we ran a general regression with the baseline model. 

Table 2. The general model 
Source:  SID.  Dependent  variable:  rate  of  change  in  total  employment.  Standard  errors  are 
robust and clustered by industry, reported in brackets. * is significant at 10% level, ** at 5% and 
*** at 1% level. Weights are the number of employees. 

Share of firms that indicate internal source for 
innovation 
Share of firms that innovate to reduce labour 
cost 
Average rate of growth of labour 
compensation per employee 
Export growth rate 

Intermediate demand growth rate 

Household consumption growth rate 

Constant 

Observations 
F-test 
(P value) 
R2 

WLS 
0.043 
[0.019]** 
-0.042 
[0.017] ** 
-0.477 
[0.163]*** 
0.037 
[0.027] 
0.202 
[0.051]*** 
0.074 
[0.032]** 
0.433 
[0.560] 
349 
9.31 
(0.000) 
0.236 

As  we  can  observe,  the  technological  and  cost  competitiveness  effect  is  comparable  in 

magnitude but with negative sign. An increase by one in the share of firms indicating internal 

sources  for  innovation  will  add  0.04  percentage  points  to  the  average  employment  growth, 

while  the  opposite  will  happen  if  the  share  of  firms  that  choose  labour  saving  strategy 

increases by one point. 

Intermediate  demand  has  the  highest  impact:  1%  increase  raises  by  one  fifth  of  percentage 

point  the  annual  compound  rate  of  employment.  Household  consumption  had  the  lowest 

impact, while export is not significant. 

The wage term has a negative impact, through a standard labour-demand effect. 

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The first differentiation that we want to examine is between manufacturing and services. The 

results  are  in  Table  3.  If  we  use  similar  proxies  for  technological  strategies  in  both 

manufacturing  and  services  we  can  observe 
for 
manufacturing.5 Other proxies that better fit the type of innovation of manufacturing industries, 

that  variables  are  non-significant 

such  as  those  focusing  on  the  relationship  with  clients  and  suppliers  in  the  search  process 

clearly make the technological-cost competitiveness distinction emerge. 

Table 3. Manufacturing versus services 
Source:  SID.  Dependent  variable:  rate  of  change  in  total  employment.  Standard  errors  are 
robust and clustered by industry, reported in brackets. * is significant at 10% level, ** at 5% and 
***  at  1%  level.  Regression  was  ran  on  the  overall  sample  with  coefficient  differentiated 
between manufacturing and services. Weights are the number of employees. 

Share of firms that indicate 
clients as source of innovation 
Share of firms that indicate 
suppliers as source of 
innovation 
Share of firms that indicate 
internal source for innovation 
Share of firms that innovate to 
reduce labour cost 
Average growth of labour 
compensation per employee 
Export growth rate 

Intermediate demand growth 
rate 
Household consumption growth 
rate 
Constant 

Observations 
F-test 
(P value) 
R2 

Services 

0.082 
[0.025]* 
-0.058 
[0.35]** 
-0.416 
[0.158]* 
-0.004 
[0.031] 
0.232 
[0.068]*** 
0.093 
[0.057]* 

Manufacturing 
0.033 
[0.015]** 
-0.052 
[0.021]** 

-0.600 
[0.142]*** 
0.049 
[0.039] 
0.016 
[0.042] 
0.026 
[0.019] 

0.316 
[0.377] 
349 
9.31 
(0.000) 
0.236 

When different variables are introduced for manufacturing and services, innovation strategies 

are  qualitatively  different  but  quantitatively  comparable  in  their  effects  through  the  two 

groupings.  Indeed,  technological  and  cost  competitiveness  are  well  captured  respectively 

through  the  share  of  firms  indicating  clients  and  those  indicating  suppliers  as  source  of 

innovation. A t-test of the difference of impact between the manufacturing and services proxy 

5 The results are available from the author upon request.  

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JOB CREATION IN BUSINESS SERVICES 

does  not  reject  the  hypothesis  of  a  zero  difference  at  5%  confidence  level.  This  is  a  main 

result  of  the  analysis  conducted  using  SID  data  (Bogliacino  and  Pianta,  2010  and  2011);  its 

validity is confirmed in this paper. 

Adding  1%  to  the  share  of  firms  that  choose  technological  competitiveness  translates  into  a 

higher  employment  growth  rate  of  +0.03%  for  manufacturing  and  +0.08%  for  services. 

Increasing the share of firms who opt for cost competitiveness by 1%, subtracts around 0.05-

0.06 percentage points from the employment growth rate.  

The  demand  effect  is  largely  confined  to  services,  since  for  manufacturing  they  are  never 

significant  (meaning  that  the  effect  is  captured  by  productivity):  again  the  largest  impact 

comes from intermediate demand, where 1% increase in demand adds 0.23% to the average 

employment growth rate.  

5.2. Capturing the peculiarity of business services 

In the following Table we extend the baseline model to account for the heterogeneity between 

manufacturing, business services and the rest of the service sector. 

Table 4. The role of business services 
Source:  SID.  Dependent  variable:  rate  of  change  in  total  employment.  Standard  errors  are 
robust and clustered by industry, reported in brackets. * is significant at 10% level, ** at 5% and 
***  at  1%  level.  Regression  was  ran  on  the  overall  sample  with  coefficient  differentiated 
between  manufacturing,  business  services  and  other  services.  Weights  are  the  number  of 
employees. 

Share of firms that 
indicate clients as source 
of innovation 
Share of firms that 
indicate suppliers as 
source of innovation 
Share of firms that 
indicate internal source 
for innovation 
Share of firms that 
innovate to reduce 
labour cost 
Average rate of growth 
of labour compensation 
per employee 
Export growth rate 

Intermediate demand 
growth rate 

Manufacturing 
0.029 
[0.015]* 

-0.054 
[0.021]** 

-0.598 
[0.146]*** 

0.047 
[0.040] 
0.003 
[0.043] 

20

Business services 

Other services 

0.068 
[0.036]* 

-0.040 
[0.065] 

-0.561 
[0.163]* 

-0.068 
[0.052] 
0.245 
[0.122]** 

0.034 
[0.024] 

-0.059 
[0.032]* 

-0.601 
[0.114]*** 

-0.046 
[0.023]* 
0.270 
[0.059]*** 

 
 
 
 
 
 
  
 
 
 
 
 
 
 
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Household consumption 
growth rate 
Constant 

Observations 
F-test 
(P value) 
R2 

0.027 
[0.020] 

0.043 
[0.066] 

0.152 
[0.064]** 

0.583 
(0.403) 
347 
13.06 
(0.000) 
0.510 

As we can observe, there are three sorts of trajectories emerging: manufacturing shows both 

technological and cost competitiveness, but no demand effect; business services are focused 

on technological competitiveness and intermediate demand is its main source of demand; and  

finally,  other  services  are  cost  competitiveness  intensive  and  intermediate  and  household 

demand are the main job creation drivers. 

On the orders of magnitude, we can observe that rising by 1% the share of firms that choose 

technological  competitiveness  three  basis  point  are  added  to  the  employment  growth  in 

manufacturing, and seven basis points in business services. If we were to increase the share 

of  firms  that  choose  cost  competitiveness  by  1%,  around  0.05%  is  subtracted  from  the 

average  employment  growth  in  manufacturing  and  other  services.  Demand  counteracts  this 

direct labour saving effect in the rest of the service sector, but not in manufacturing, where this 

compensatory mechanism does not work, at least in the time span considered. 

It is also very important to stress that this model captures the heterogeneity quite well: in fact, 

it is able to account for around 50% of total variance. 

5.3 Controlling for market structure 

In  order  to  observe  the  robustness  of  the  above  specification,  we  used  two  variables  that 
capture  market  structure:  one  was  the  Herfindahl6  index  calculated  at  a  two-digit  level;  the 

second one is the average firm size. 

While  average  firm  size  can  be  drawn  from  CIS,  the  Herfindahl  index  is  taken  from  the  EU-

KLEMS  database  (see  O'Mahoni  et  al.,  2008).  For  some  sectors,  Herfindahl  estimates  are 

provided at a three-digit level. In order to obtain data at two digits, we weighted data at three 

digits with the respective share of production for the sector total. 

To  avoid  potential  multicollinearity  problems,  we  eliminated  the  non-significant  demand 

variables  from  the  regressions.  We  maintained  intermediate  demand  given  that  we  did  not 

wish to completely eliminate demand from the manufacturing equation. 

6 Herfindahl Index is a concentration index calculated as the sum of squares of the shares: 

H

2  
is

∑=
i

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The  concentration  shows  a  negative  and  significant  effect  in  manufacturing  industries, 

indicating that rent consolidation negatively affects job creation, because competitive pressure 

to invest is lacking. No significant effect is found for services. 

On the contrary, average firm size is showing a negative and significant impact for business 

services. The latter are leading the structural change process, thus the job creation effect is 

mainly driven by entry of new small firms, coherently with its dynamism. No significant effect is 
found in the other two subgroups.7 

We  summarise  the  effect  by  running  the  regression  using  the  Herfindahl  for  manufacturing 

and the average firm size for services. 

Table 5. The baseline model with market structure determinants 
Source:  SID.  Dependent  variable:  rate  of  change  in  total  employment.  Standard  errors  are 
robust and clustered by industry, reported in brackets. * is significant at 10% level, ** at 5% and 
***  at  1%  level.  Regression  was  ran  on  the  overall  sample  with  coefficient  differentiated 
between  manufacturing,  business  services  and  other  services.  Weights  are  the  number  of 
employees. 

Business services 

Other services 

Manufacturing 
0.038 
[0.015]** 

-0.048 
[0.021]** 

-2.493 
[1.400]* 

-0.564 
[0.139]*** 

Share of firms that 
indicate clients as source 
of innovation 
Share of firms that 
indicate suppliers as 
source of innovation 
Share of firms that 
indicate internal source 
for innovation 
Share of firms that 
innovate to reduce 
labour cost 
Herfindahl Index 

Average firm size 

Average rate of growth 
of labour compensation 
per employee 
Export growth rate 

Intermediate demand 
growth rate 
Household consumption 
growth rate 
Constant 

0.059 
[0.043] 

0.270 
[0.112]** 

0.465 

7 These results are available from the authors upon request. 

22

0.078 
[0.033]** 

0.025 
[0.062] 

-0.821 
[0.343]*** 
-0.565 
[0.152]*** 

0.013 
[0.029] 

-0.035 
[0.032] 

-0.889 
[1.152] 
-0.566 
[0.155]*** 

0.144 
[0.023]* 
0.280 
[0.058]*** 
0.169 
[0.067]** 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

Observations 
F-test 
(P value) 
R2 

(0.470) 
302 
11.13 
(0.000) 
0.524 

In  summary,  employment  in  manufacturing  is  largely  explained  by  the  positive  effect  of 

technological competitiveness and the negative direct effect of cost competitiveness; it is also 

negatively affected by concentration. In traditional and finance services, dynamics are largely 

explained by demand evolution (and at least for the latter part, also partly artificially inflated by 

bubble processes). 

Finally business services show a Schumpeter Mark I trajectory, where entry by new firms and 

product  innovation  are  the  key  determinants  of  the  sector’s  evolution,  coupled  with 

intermediate  demand’s  significantly 

important  role,  related  with 

the  process  of  de-

verticalisation and globalisation. 

5.4 Controlling for occupational structure 

 An interesting insight that we can add using SID is the relationship between the employment 

structure and polarisation. At this stage we can only discuss association and not the causality 

chain,  for  two  main  reasons:  a)  on  the  one  hand,  we  are  missing  information  due  to  limited 

data, the sample is significantly reduced and we were confronted by a major problem related 

to  using  the  lag  structure  to  identify  effects;  b)  on  the  other  hand,  it  is  really  problematic  to 

identify causality chains; both phenomena are influenced by technology (Acemoglu, 2002) and 

quantity and quality of labour are interrelated. 

Data on Professions composition of sectors include measures drawn from the national Labour 

Forces  Surveys  (LFS).  It  allows  us  to  collect  sectoral  data  on  professions,  education  of 

employees within each sector for five European countries (NACE Rev. 1) (The Netherlands is 

excluded)  through  harmonised  surveys  that  do  not  have  confidentiality  problems.  Data  were 

collected from 2000 to 2003. The former is associated with the first period and the latter with 

the second one in our SID database. As we discussed above (see footnote 4), we divided the 

10  International  Standard  Classification  of  Occupation  (ISCO)  occupational  classes  into 
managers, clerks, crafts and manual workers.8 

In  Table  6,  we  ran  the  regression  using  a  polarisation  measure,  computed  as  the  shares  of 

managers and manual workers in total employment over the total number of shares of clerks 

8 National Labour Force Surveys (LFS) are the main sources of data on professions in Europe, as they 
provide  comparable  and  detailed  information  on  professions  categorised  by  of  employing  firms’ 
economic activity sector (see Lucchese and Pianta, 2011). 

23

 
 
 
 
 
 
 
                                                 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

and crafts workers. 

We  added  controls  for  demand  and  market  structure.  We  eliminated  the  technological 

variables because, as discussed above, employment composition tends to capture the same 

dynamics as knowledge accumulation. As we stressed, this is a measure of association and 

not of causation, so we are not particularly concerned about omitting variable problems. 

Table 6. Employment growth and polarisation 
Source:  SID.  Dependent  variable:  Rate  of  change  in  total  employment.  Standard  errors  are 
robust and clustered by industry, reported in brackets. * is significant at 10% level, ** at 5% and 
***  at  1%  level.  Regression  was  ran  on  the  overall  sample  with  coefficient  differentiated 
between  manufacturing,  business  services  and  other  services.  Weights  are  the  number  of 
employees. 

Business services 
0.690 
[0.181]** 

Other services 
-0.318 
[0.150]** 

Manufacturing 
-0.935 
[0.204]*** 
-3.110 
[1.380]*** 

-0.562 
[0.169]*** 

1.279 
[0.112] 
-1.604 
[0.419]*** 

-0.097 
[1.279] 
-0.566 
[0.155]*** 

-0.056 
[0.154] 
0.179 
[0.078]** 
0.138 
[0.115]** 

0.095 
[0.047]* 

-0.145 
[1.136]** 

0.465 
(0.470) 
148 
14.74 
(0.000) 
0.616 

Polarisation 

Herfindahl Index 

Average firm size 

Average rate of growth 
of labour compensation 
per employee 
Export growth rate 

Intermediate demand 
growth rate 
Rate of growth of 
household consumption 
Constant 

Observations 
F-test 
(P value) 
R2 

Coherently  with  the  descriptive  evidence  presented  in  Section  3,  the  results  show  a 

fundamental  difference  between  manufacturing  and  business  services:  in  the  former  the 

employment structure is associated with the more ‘fordist’ system in which employment growth 

is  associated  with  middle-range  human  capital.  Business  services  behave  in  the  reverse 

manner: their growth is concentrated into a very high and a very low (mainly those constrained 

not  to  be  outsourced)  position  in  the  job  ranking  and  as  such,  polarisation  is  strongly 

associated  with  structural  change  towards  those  industries  (for  an  explanation  of  the 

technological determinants see Autor and Dorn, 2010 and Nascia and Pianta, 2008).  

Other  services  show  a  pattern  similar  to  manufacturing  but  with  a  significantly  lower 

24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

association, probably due to high heterogeneity inside the group. 

6  Conclusions and policy implications 

Building  on  the  well-documented  differences  between  manufacturing,  business  services  and 

other  services  in  terms  of  structural  change,  we  have  shown  that  business  services  have 

outperformed  job  creation  in  other  economic  activities  in  major  European  countries  over  the 

last  two  decades.  Other  services  show  heterogeneous  patterns,  ranging  from  employment 

growth  in  selected  niches  to  job  losses  due  to  restructuring  in  retail  trade,  banking  and 

financial activities. Conversely, employment in manufacturing has shown a general downward 

trend, with few exceptions in high-innovation sectors and in the industries of greater national 

specialisation among European countries. 

We  have  investigated  the  fundamental  mechanisms  leading  to  such  patterns  of  structural 

change, paying attention both to technological change on the supply side, and to the sources 

of  demand.  Analysing  the  role  of  technological  change  has  confirmed  the  presence  of  two 

contrasting effects. First, industries where a technological competitiveness strategy prevails – 

based  on  knowledge  creation,  product  innovation  and  development  of  new  markets  –  show 

strong job-creation ability. Second, industries dominated by a search for cost competitiveness 

– relying on acquisition of technologies from suppliers, labour saving strategies and process 

innovations – tend to use technologies to replace labour and show serious job losses. These 

findings  are  consistent  with  the  extensive  literature  reviewed  in  Section  2,  which  we  have 

systematically  compared  first  between  manufacturing  and  services  overall,  and  then 

considering business services and other services independently. In all cases we have found 

that these relationships are maintained. The nature of the impact of technological change on 

employment is the same in all industries, with innovations focusing on new products that are 

capable of increasing employment, while new processes lead to job losses. The pace at which 

this happens, however, is different in business services and in the rest of the economy. The 

job  creation  mechanisms  in  the  former  indeed  appear  to  be  stronger  than  in  the  latter,  and 

some of the limits to job creation (e.g. the negative effect of high wage growth) are weaker in 

business services than in other industries. 

In  fact,  we  have  found  that  different  variables  capture  these  contrasting  patterns  in 

manufacturing  and  service  industries  in  a  more  effective  way;  in  the  former  the  search  for 

technological competitiveness is better documented by the orientation towards clients, while in 

the latter by the use of internal sources as main source of innovation. 

25

 
 
 
 
 
 
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JOB CREATION IN BUSINESS SERVICES 

Conversely, a cost-competitiveness strategy is reflected by the suppliers in the manufacturing 

sector and by aiming to reduce labour costs in the services sector. 

Structural change, however, is not the result of developments in the supply side alone. On the 

demand side industries are affected by different sources of intermediate and final demand – 

both  domestic  and  foreign  –  that  grow  at  differing  paces  and  shape  the  expansion  of 

industries’ economic activities and jobs (Pasinetti, 1981). 

The  strongest  differentiation  between  manufacturing,  business  services  and  other  services 

emerges  on  the  demand  side.  In  explaining  industries’  employment  growth,  we  have  shown 

that manufacturing job decline has been affected by the lack of demand. 

Conversely, jobs in business services grow as a result of the strong dynamics of intermediate 

demand,  as  all  industries  increasingly  need  the  research,  software,  consulting,  accounting, 

communication services offered by business services. This is shaping a new pattern of inter-

industry  interdependencies  where  business  services  play  a  key  role  in  the  whole  economic 

system’s competitiveness (Evangelista, Lucchese, Meliciani, 2011). 

Other services play a role in different demand sources: by far, demand is the main job growth 

driver, contrasted with a technological dimension which is mainly labour saving, being focused 

on cost competitiveness. 

Job creation mechanisms in business services therefore appear distinct in relation to the rest 

of the economy: new knowledge and new products, fast-growing demand from other industries 

and greater space for wage increases characterise the business service employment growth. 

When we control for market structure we see that concentration is negatively associated with 

job growth in manufacturing, while in business services there is a clear negative relationship 

between the average firm size and job growth, suggesting that the industry growth is driven by 

entry of new firms and growth of small ones. 

Finally, when we look at the dynamics of knowledge generation and accumulation through the 

structure of human capital, we observe that there is a clear distinction between manufacturing 

and  services.  Using  four  occupational  categories  (share  of  managers,  clerks,  crafts  and 

manual workers) we built a polarisation measure as the ratio of the share of top and bottom 

occupation (manual plus managers) over the sum of shares of crafts and clerks. The resulting 

variable  is  positively  associated  with  job  growth  in  business  services  and  negatively  in 

manufacturing  and  other  services.  These  effects  capture  the  different  skill  composition 

required  by  the  technology  set  available  in  manufacturing  (more  ‘Fordist’)  and  in  the  new 

business services, where ICTs are prominent. 

There are a few policy implications to stress: 

26

 
 
 
 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

a)  Since  intermediate  demand  is  becoming  more  and  more  important  due  to  globalisation 

processes,  demand  management  policies  are  very  relevant  for  the  process  of  job  creation. 

Negative shocks have stronger effects in the economy; 

b)  Given  the  entry  of  new  firms  plays  an  important  role  in  the  dynamics  of  business  service 

employment growth, it suggests that entry barriers should be eliminated in the most dynamic 

parts of the economy; 

c) Where cost competitiveness is stronger, policies facing labour reallocation are fundamental 

to soften the impact of restructuring; 

d) Business service growth induces a transformation of the skill mix required by the economy, 

i.e. increasing polarisation and reducing middle-class jobs, which requires proper intervention 

of the authorities to prevent negative effects of inequality. 

Acknowledgements 

This  paper  builds  on  a  presentation  to  the  workshop  “Business  services  for  innovation, 

internationalisation and growth”, held at the University of Rome La Sapienza, 2-3 December 

2010. We would like to thank Rinaldo Evangelista, Valentina Meliciani and the participants for 

their comments. 

We acknowledge financial support from IPTS with the Project 151834 - Gathering quantitative 

evidence  of  the  impact  of  corporate  R&D  and  innovation  on  employment:  An  analysis  of 

demand, supply and institutional factors at industry and firm level. 

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Appendix  

Information on employment changes for each service industry and for the all of manufacturing 

is provided in Graph A1 below. 

Graph A1. Compound annual rates of employment growth. Averages across countries. 

30

 
 
 
 
 
 
 
 
IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

Source: SID database 

The  analysis  of  the  composition  of  employment  by  professions  in  Graph  A2  shows  that 

business  services  are  characterised  by  a  strong  polarisation  process  that  is  contrasting  with 

the  expected  professional  up-skilling  process.  Employment  growth  for  manual  workers  in 

business services is due to the rise of manual workers in less-qualified and ancillary activities, 

together  with  a  strong  shift  of  employment  in  Post  and  Telecommunications  industry  in  the 

United Kingdom. 

Graph A2. Changes in employment by professional groups: 2000-2003. 

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IPTS WORKING PAPER ON CORPORATE R&D AND INNOVATION - 04/2011 
JOB CREATION IN BUSINESS SERVICES 

Source: SID database 

Graph  A3  shows  the  composition  of  demand  for  each  macro  sector.  While  manufacturing  is 

characterised  by  a  strong  share  of  exports,  traditional  and  finance  services  are  related  to 

internal  demand.  As  expected,  business  services  are  linked  to  the  demand  for  intermediate 

consumption, while the other components only constitute a modest share of total demand. 

Graph A3. Composition of demand in 2000. Averages among countries. 

Source: SID database 

32

 
 
 
 
 
 
 
 
 
 
 
European Commission 

EUR 24747 EN/4 – Joint Research Centre – Institute for Prospective Technological Studies 

IPTS WORKING PAPER on CORPORATE R&D AND INNOVATION - No. 04/2011 
Title: Job creation in business services: innovation, demand, polarisation 
Author(s): Francesco Bogliacino (European Commission, Joint Research Center- Institute for Perspective 
Technological Studies, Seville; Rise Group, Medellin), Matteo Lucchese (University of Urbino) and Mario Pianta 
(University of Urbino) 
Luxembourg: Publications Office of the European Union 
2011 
EUR – Scientific and Technical Research series – ISSN 1831-9408 
Technical Note – ISSN 1831-9424 
ISBN 978-92-79-21146-1 
doi:10.2791/63330 

Abstract 

The patterns and mechanisms of job creation in business services are investigated in this article by 
considering  the  role  of  innovation,  demand,  wages  and  the  composition  of  employment  by 
professional groups. A model is developed and an empirical test is carried out with parallel analyses 
on  a  group  of  selected  business  services,  on  other  services  and  on  manufacturing  sectors, 
considering six major European countries over the period 1996-2007. 

Within  technological  activities,  a  distinction  is  made  between  those  supporting  either  technological 
competitiveness,  or  cost  competitiveness.  Demand  variables  allow  identifying  the  special  role  of 
intermediate demand. 

Job  creation  in  business  services  appears  to  be  driven  by  efforts  to  expand  technological 
competitiveness  and  by  the  fast  growing  intermediate  demand  coming  from  other  industries; 
conversely,  process  innovation  leads  to  job  losses  and  wage  growth  has  a  negative  effect  that  is 
lower  than  in  other  industries.  Business  services  show  an  increasingly  polarised  employment 
structure. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The mission of the Joint Research Centre is to provide customer-driven scientific 
and technical support for the conception, development, implementation and 
monitoring of European Union policies. As a service of the European Commission, 
the Joint Research Centre functions as a reference centre of science and technology 
for the Union. Close to the policy-making process, it serves the common interest of 
the Member States, while being independent of special interests, whether private or 
national. 

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