Structural Transformation and the Volatility of Aggregate Output in OECD Countries
30 Pages Posted: 7 Mar 2013
Date Written: February 2013
Abstract
This paper finds a negative relationship between the employment share of the service sector and the volatility of aggregate output in the OECD — after controlling for the level of financial development. This result reflects volatility differentials across sectors: labor productivity is more volatile in agriculture and manufacturing than in services. Aggregate output would therefore become less volatile as labor moves away from agriculture and manufacturing and toward the service sector. I examine the quantitative role of these labor shifts — termed structural transformation — on the volatility of aggregate output in OECD countries. I first calibrate to the U.S. economy an indivisible labor model in which the reallocation of labor across sectors emerges endogenously from sectoral labor productivity growth differentials. The setup is then used to generate the time path of labor shares in agriculture, manufacturing and services in individual countries. Finally, I perform a set of counterfactual analyzes in which the reallocation of labor across sectors is constrained endogenously. I find that the secular shift of labor towards the service sector was volatility-reducing in OECD countries during 1970–2006.
Keywords: Dynamic general equilibrium, Economic models, Employment, Indivisible labor, Labor productivity, OECD, Output volatility, Service sector, Services sector, Structural transformation., aggregate employment, average employment, civilian labor force, employment, employment data, employment in agriculture, employment share, employment shares, employment to population ratio, jobs, labor force, labor market, labor market outcomes, labor mobility, labor productivities, labor productivity, labor productivity growth, labor productivity levels, labor reallocation, labor share, labor shares, sectoral employment, self-employment, share of employment, total employment
JEL Classification: E32, O11, O14
Suggested Citation: Suggested Citation