The role of service sector in compensation of job losses and the effects of wages on economy

ABSTRACT The paper deals with the compensation of job losses in labor intensive sectorof economy. Authors concludethat thehigh-techmanufacturing industriesdo not playa significant rolein solving the problemsof employment. Service sectorto a certain extent is capableto absorb the workforce. Thus, there appears a problem of adequate labor remuneration in public sector. The basic principle of adequate wages – marginal efficiency of labor, depending mainly on productivity in private production sector is effective. The wage problem in private service sector is more complicated, as the productivity growth in service sector commonly is slower than in production sector, and there appears a gap between productivity and wages, which is broadly known as Balassa – Samuelson effect. The problem becomes more complicated, considering public service sector, where the prices are set not by market, particularly in public administration, where it is hardly possible to speak about productivity. Thus the marginal efficiency principle in public administration is not effective, and there should be introduced some other principles. The paper discusses the negative effect of economy that appears, if the wage growth in public administration sector overtakes the growth of productivity in economy as a whole. Keywords:Wages, employment, productivity, public administration