||Why did services become the dominant sector in industrialized economies? While abundant
literature exists on the transition from agriculture to industry (i.e., the industrial revolution), there is
no consensual explanation for the second wave of structural change. I argue that sectoral differences
in regulation affecting the degree of competition in labor and goods markets explain: (a) the rise in
the services sector share of output and employment, (b) international differences in cross-sector
structure, and (c) changes in relative wages among sectors. Using evidence on market
imperfections, I calibrate a two-sector model where household unions bargain with firms for wages.
The least competitive sector pays higher wages, and employment is restricted accordingly. The
model produces time series consistent with the “service revolution” as experienced in the Unites
States and European economies between 1950 and 2000. In particular, while generating changes in
shares of output and employment, the model offers an explanation for relative wage differences,
which the standard literature fails to capture.