Abstract ：
This paper demonstrates whether large core sectors (the specialized sectors or manufacturing sectors) in the local economy improve the productivity of local non-tradable service sectors and then increase employment using Japanese micro-data. The demand-size of service sectors are determined by the size ofthelocal economy and the size of the local economy is determined by the core sectors. The core sectors are mostly tradable sectors and their demand-size is not limited by the local market size because their goods can supply otherregions. The large demand-size of service sectors induces heightened competition and it improves their productivity by Darwinian selection or efficiency increases within firms.
As a result, a 1% larger volume of added value in the specialized sectors in the previous estimation period, a 1% increase in the change in that added value,and a 1% larger volume of added value in the manufacturing sectors in the previous period increase the productivity of the service sectors by approximately 4~5 %, 4% and 2.5%, respectively. Anincrease of a hundred thousand dollars of added value in the specialized sectors increasesthe employment by45 employeesinthe local service sectors. Furthermore, this paper supports efficiency increases within firms as a mechanism.

Keywords : productivity of service sectors, employment in the service sectors, local economy,manufacturing sectors, specializedsectors

JEL code: D24, O47,J21, R11