The Role of the Structural Transformation in Aggregate Productivity

We investigate the role of sectoral differences in labor productivity and the process of structural transformation (the secular reallocation of labor across sectors) in accounting for the time path of aggregate productivity across countries. Using a simple model of the structural transformation that is calibrated to the growth experience of the United States, we measure sectoral labor productivity differences across countries. These differences are large and systematic: labor productivity differences between rich and poor countries are large in agriculture and services and smaller in manufacturing. When fed into the model, these sectoral labor productivity differences and the structural transformation they produce account for more than 50 percent of the fast catch-up in aggregate productivity observed in less developed economies and all of the stagnation and decline observed in more developed economies in recent decades.