China’s Cost Disease And Its Welfare Effects In Service Sector

The financial crisis in2008originated in the US and gradually spread to the global triggered a worldwide thinking on economic development issues, the crisis was not just caused by cyclical factors during economic development, the structural factors also played a very important role. Alleviating the economic crisis is inseparable from economic restructuring, economic restructuring is largely the adjustment of industrial structure, which makes services sector becoming increasingly significant. In2014, China’s service industry developed rapidly, service industry accounted for larger proportion of GDP than the secondary industry, service industry has made the largest contribution to economic growth; at the same time, employment absorbed by the service sector increased rapidly, service industry has become the sector absorbing the most employment. The services sector is becoming increasingly important in the national economy and social development. However, an innegligible feature in the service sector is the growth of labor productivity lagging behind the second industry, which makes the discussion about service industry’s cost disease problems on the agenda. In this paper, China’s service industry is acted as the research object, I will research on the existence of China’s service industry’s cost disease and its welfare effects with the theoretical analysis and empirical analysis methods.On the basis of previous studies, this paper firstly reviewed literature of the sort, summarizing the general characteristics and forms of service cost disease, and then constructed econometric models including the price, wages and output, inputs and output data was used to measure the productivity of labor and the price elasticity and income elasticity of demand of the service industry, measuring the cost disease problem. In this paper, China’s30provinces’(except Tibet) panel data from1999to2012was used to make regression, the empirical results show the existence of the cost disease risks in both national level and sub-regional level. In addition, the paper discussed the general mechanism of service cost disease affecting the level of benefits from the perspective of price and income effects, and explored the conduction path of services cost disease affecting welfare level from the perspective of standardized and non-standardized services level. On this basis, this paper constructed a three-sector theoretical model on service cost disease affecting the welfare, and derived equilibrium price level by solving the model, discussing the most appropriate service price level which can maximize the level of benefits. On the basis of theoretical analysis, the paper constructed econometric models containing the level of benefits, services price, wages, and other control variables affecting service cost disease, the empirical results show that China’s service industry cost disease does not lower the level of benefits in both national or sub-regional level,, and the possible reasons for such an outcome were discussed. Finally, on the basis of theoretical analysis and empirical research, this article proposed policy recommendations on how to relieve China’s service cost disease risks, promote the healthy development of the service sector, and improve the level of social welfare steadily.