Structural transformation and its implications for the Chinese economy

This study examines China's structural transformation under the assumption that its employment structure converges to that in major developed economies in one and a half decades. The required annual output differentials between tradable and nontradable sectors, productivity increment in the nontradable sector, and government expenditure increment are estimated with the goal of employment stability conditional on population ageing. It appears that labour transfer from the tradable sector to the nontradable sector would be accompanied by relatively large aggregate output changes due to population ageing and efficiency changes in the tradable sector. Consumer price and real exchange rates are less affected during structural transformation. Although fiscal deficit would increase, government expenditure as a tool to stabilize employment is welfare improving as long as job switching is not cost prohibitive.