The Macroeconomics of The Division of Labor

This paper presents a theoretical and empirical study of the differentiation of labor. It is based on the relation between the division of labor existing within firms and the differentiation of the firms themselves, according to the tasks performed by their workers. The internal division of labor takes place within firm and is limited by coordination costs. It generates potential demand for new tools, which creates new firms and a further increase in the division of labor. It is shown that the increase in the differentiation of labor yields a growth mechanism when the size of the population increases. In this process, the differentiation of firms increases but it is the actual increase in the aggregate division of labor which sustains growth. In the second part of this article, an empirical index of the diversity of labor is used at a sectorial level and an other index of the division of labor embedded in the inputs is constructed. It is shown that the division of labor affects total factor productivity through the differentiation of labor incorporated in the inputs.