Trade and structural change: An empirical investigation

This paper investigates the role of international trade in explaining the decrease of the tradable sector employment share (agriculture, mining and manufacturing). Borrowing insights from the vast theoretical literature on the determinants of structural change, we build an empirical model that allows distinguishing between long-run and short-run effects. This model is used to investigate the relative importance of the main traditional demand-side and supply-side mechanisms of structural change, assessing, in this context, the role of trade variables. To this end, we use an unbalanced panel of countries for the period 1960–2011 from the EU-KLEMS and GGDC 10-sector databases. Our results suggest that both Engelian income effects, i.e. so-called demand-side drivers, and relative productivity, i.e. the supply-side mechanism, are relevant drivers of structural change, the former, particularly, in the long-run and the latter in the short-run only. We show that international trade directly contributes to structural change: imports are negatively related with employment shifts to tradable sectors in particular in the long-run. By contrast, exports and shifts of employment towards tradables are positively associated. Trade affects structural change also indirectly by enhancing the two internal drivers of structural change, i.e. the supply-side and the demand-side one. When trade is split in intermediate and final goods, we show that in the long-run the negative elasticity of structural change to import is driven by imports of intermediate goods, while the positive sign of exports is driven by exports of final goods.