THE RISE OF SERVICES,DEINDUSTRIALIZATION, AND THE LENGTH OF ECONOMIC RECOVERY

Economic recovery is longer in service‐providing economies than in goods‐producing economies. Services cannot be produced and inventoried ahead of demand; goods can. We are the first to document this macroeconomic repercussion of the sectoral shift away from the secondary sector toward the tertiary sector, that is, of deindustrialization and the rise of services. We distinguish between nontradable services and all other sectors, using U.S. state‐level employment data for post‐1960 recessions. Concerns over the endogeneity of services are addressed in two ways: by using 3‐year pre‐recession averages of sector shares, and separately by invoking instrumental variables. Our results are robust to alternative specifications. The increase in service production and deindustrialization in the United States over the last half‐century lengthens the trough‐to‐peak employment recovery from recessions by about 40%. (JEL E24, E32, L80, N12)