Anatomizing the Mechanics of Structural Change

Abstract

We characterize several possible mechanisms of structural change by using a general multisector growth model, where preferences and technologies are not parameterized. In this generic set up, we derive the growth rates of sectoral employment shares at the equilibrium. We find that the economic fundamentals governing structural change in the sectoral employment shares are: (i) the income elasticities of the demand for consumption goods; (ii) the Allen-Uzawa elasticities of substitution between consumption goods; (iii) the capital income shares in sectoral outputs; and (iv) the elasticity of substitution between capital and labor in each sector. These fundamentals determine the effect that the growth rates of aggregate income, relative prices, rental rates and technological progress have on structural change. Finally, we estimate the aforementioned fundamentals to develop an accounting exercise that quantifies the contribution of each mechanism to the U.S. structural change.