Agricultural Composition, Structural Change and Labor Productivity

The differences in labor productivity between developed and developing countries are substantially larger in agriculture than in non-agriculture. We argue that structural change within agricultural sectors explains part of these differences. We consider two agricultural sectors that are differentiated only by the capital intensity of the production function. As capital accumulates, the price of the non-capital intensive agricultural sector relative to the price of the capital intensive agricultural sector increases. This price change drives a process of structural change within agriculture that depends on the value of the elasticity of substitution among agricultural goods. When this elasticity is large, we show that this structural change driven by capital accumulation implies (i) a reduction in the number of farmers; (ii) an increase in the average farm size; (iii) an increase in the capital intensity of the agricultural sector relative to the non-agricultural sector; and (iv) an increase in the labor productivity of the agricultural sector relative to the non-agricultural sector. We highlight that if the elasticity is low then the sectoral composition within the agricultural sector remains constant, which implies that capital intensity does not increase, the increase in the average farm size is small and, hence, the increase in the labor productivity of the agricultural sector is also small. We conclude that structural change within agriculture contributes to explain the fast increase in agricultural productivity.