business process outsourcing (BPO), and other business services (McMillan, Rodrik, and Sepulveda 2017).

Further, there is evidence of unconditional convergence of productivity to the frontier: countries starting from lower labor productivity in the services sector grew faster than those with higher initial labor productivity in that sector (Enache, Ghani, and O’Connell 2016; Kinfemichael and Morshed 2016). This relates to the fact that new ICT technologies, international tradability, and increased competition, especially since the 1990s, were no longer within the exclusive domain of manufacturing. There are differences across subsectors. For instance, IMF (2018) finds significant convergence in trade and accommodation, transport and communications, and financial and business services. The evidence of convergence notwithstanding, prospects for narrowing productivity gaps may be reduced if the level of productivity in services is further away from the technological frontier compared to manufacturing. However, for most developing countries, the productivity gap vis-à-vis the United States in 2005 was larger for goods-producing sectors than for the service sector (IMF 2018).

<u>Trade-off between productivity growth and job creation</u> Ancillary evidence suggests that service industries with favorable productivity dynamics account for a meaningful share of employment and can play a key role in driving aggregate productivity growth. For instance, financial intermediation in Hungary, Russia, and Slovenia; and telecommunication services in Korea and Lithuania registered above-average labor productivity growth and rising employment shares during the 2000s (IMF 2018). Furthermore, as technology creates new occupations largely in the non-routine cognitive category, much of this job expansion will occur in finance, telecommunications, software, legal and professional services. For example, estimates suggest that two-thirds of new occupations in India and 85 percent in Vietnam are in these high-productivity service sectors (Asian Development Bank 2018).

However, service industries that rank in the top third of the labor-productivity growth distribution between 2000 and 2010 accounted, on average, for about 30 percent of total service employment, and close to 20 percent of overall employment (IMF 2018). What is more, most service sectors that exhibit “productivity-enhancing” characteristics are less likely to be associated with employment creation for unskilled labor. This is reflected in Nayyar, Cruz and Zhu (2018), which classifies manufacturing and service subsectors based on firm-level data from six LMICs along a range of trade, innovation, learning-by-doing and factor-use characteristics. IT services, for example, are classified as “high” or “medium” with regard to their potential for scale economies; exports; and innovation as measured by new products, new processes, and R&D spending, but also belong to the group that is “high” in skill intensity. Therefore, without sufficient human capital, there are limits to how much labor can be absorbed in highly skill-intensive service sectors – it is comparatively easy to turn a rice farmer into a garment factory worker than a software engineer.

Much of the employment expansion across developing countries over the past few decades was accounted for by wholesale and retail trade, hotels and restaurants, and construction (IMF 2018; Nayyar 2012). Yet, these unskilled labor-intensive services are less likely to provide much by way of productivity gains. Again, this dichotomy is reflected in Nayyar, Cruz and Zhu (2018) where 11