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The Role of Labor Markets in Structural Change

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  • Miguel Ricaurte

Abstract

Why did services become the dominant sector in industrialized economies? While abundant literature exists on the transition from agriculture to industry (i.e., the industrial revolution), there is no consensual explanation for the second wave of structural change. I argue that sectoral differences in regulation affecting the degree of competition in labor and goods markets explain: (a) the rise in the services sector share of output and employment, (b) international differences in cross-sector structure, and (c) changes in relative wages among sectors. Using evidence on market imperfections, I calibrate a two-sector model where household unions bargain with firms for wages. The least competitive sector pays higher wages, and employment is restricted accordingly. The model produces time series consistent with the “service revolution” as experienced in the Unites States and European economies between 1950 and 2000. In particular, while generating changes in shares of output and employment, the model offers an explanation for relative wage differences, which the standard literature fails to capture.

Suggested Citation

  • Miguel Ricaurte, 2010. "The Role of Labor Markets in Structural Change," Working Papers Central Bank of Chile 584, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:584
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    References listed on IDEAS

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    1. Angrist, Joshua D. & Krueger, Alan B., 1999. "Empirical strategies in labor economics," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 23, pages 1277-1366 Elsevier.
    2. Daron Acemoglu & Veronica Guerrieri, 2008. "Capital Deepening and Nonbalanced Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 467-498, June.
    3. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 879-907.
    4. Barry T. Hirsch, 2008. "Sluggish Institutions in a Dynamic World: Can Unions and Industrial Competition Coexist?," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 153-176, Winter.
    5. Richard Rogerson, 2008. "Structural Transformation and the Deterioration of European Labor Market Outcomes," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 235-259, April.
    6. Messina, Julian, 2006. "The role of product market regulations in the process of structural change," European Economic Review, Elsevier, vol. 50(7), pages 1863-1890, October.
    7. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
    8. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    9. John Laitner, 2000. "Structural Change and Economic Growth," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 545-561.
    10. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-452, May.
    11. David G. Blanchflower & Alex Bryson, 2004. "What Effect Do Unions Have on Wages Now and Would Freeman and Medoff Be Surprised?," Journal of Labor Research, Transaction Publishers, vol. 25(3), pages 383-414, July.
    12. Magnus Jonsson, 2007. "The welfare cost of imperfect competition and distortionary taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 576-594, October.
    13. Miguel Ricaurte, 2009. "Interindustry Wage Differences: An Empirical Review," Working Papers Central Bank of Chile 525, Central Bank of Chile.
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    Cited by:

    1. Miguel Ricaurte, 2009. "Interindustry Wage Differences: An Empirical Review," Working Papers Central Bank of Chile 525, Central Bank of Chile.

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