Macro Seminar

Xarier Raurich

Universidad de Barcelona

6-Mar-2015

Seminar 3 – 12:15

Abstract

We develop a two sector growth model where the process of structural change in the sectoral composition of both employment and GDP is jointly determined by non-homothetic preferences and a labor mobility cost. This cost is paid by workers when they move to another sector and, therefore, it limits structural change. The two sectors are identified as the agriculture and non-agriculture sectors. We show that this model can explain the following patterns of development of the US economy in the period 1880-2000: (i) balanced growth of the aggregate variables in the second half of the last century; (ii) the process of structural change in the sectoral composition of employment; (iii) the process of structural change in the sectoral composition of GDP; (iv) convergence of the wages in the two sectors. We outline that the last two patterns can only be explained if we introduce the labor mobility cost. We also show that this cost generates a misallocation of production factors, implying a loss of GDP. We calibrate the model and we quantify that this loss amounts more than 30% of the GDP in the initial periods. During the transition, the loss of GDP decreases and, eventually, vanishes. Therefore, the elimination of the misallocation explains part of the increase in the GDP. We finally highlight that the misallocation introduces a mechanism through which cross-country differences in sectoral composition contribute to explain cross-country income differences

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