Services Policy Reform and Manufacturing Employment: Evidence from Transition Economies

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Policy reforms targeting the services sectors are a neglected dimension of the process of structural transformation and economic development. The effects of such reforms on employment across industries as a function of their use of services as intermediate inputs are theoretically ambiguous and remain largely understudied. This paper uses sector-level data for 24 transition economies for the 1990-2012 period to assess the impacts of services policy reforms on downstream manufacturing employment. We find a negative effect of services reforms on manufacturing sector employment. This is mostly associated with the process of transition to a market-based economy. Controlling for transition-specific dynamics, the data suggest a neutral effect of progress towards adopting “best practice” policies for upstream services on employment in downstream manufacturing. Furthermore, in line with the extant literature, we confirm that services policy reforms enhance productivity of downstream manufacturing industries. Finally, we find that the negative effects on downstream employment are mitigated in countries with better economic governance and human capital.