Labor mobility, structural change and economic growth

Abstract

This paper develops a two-sector growth model in which the process of structural change in the sectoral composition of employment and GDP is jointly determined by income effects, derived from non-homothetic preferences, and by a substitution mechanism derived from a labor mobility cost. This cost, paid by workers moving to another sector, generates a sectoral wage gap that limits structural change. Our model can explain the following patterns of development of the US economy throughout the period 1880-2000: (i) balanced growth of the aggregate variables in the second half of the last century; (ii) structural change in the sectoral composition of employment between agricultural and non-agricultural sectors; (iii) structural change process in the sectoral composition of GDP between these sectors; and (iv) wage convergence between the two sectors. We outline that in the absence of wage gaps the model is not able to jointly explain the process of structural change in the sectoral composition of both GDP and employment. This cost reduces the Possibilities Production Frontier (PPF) by constraining the sectoral allocation of production factors. This implies a loss of GDP which amounts to over 30% of the GDP throughout initial periods according to the calibrated model. During the transition, the loss of GDP decreases and eventually vanishes. Thus, the elimination of this technological constraint explains part of the increase in the GDP. Additionally, this study points out that the aforementioned technological constraint introduces a mechanism through which cross-country differences in sectoral composition may account for cross-country income differences.