Theory and Measurement of Modern Transition

Abstract

The process of modernization is neither instantaneous nor homogeneous across countries. Given the large productivity growth gap between traditional and modern sectors, the gradual and varying degree of transition between these technologies seems puzzling. We develop a theory of transition that resolves this puzzle. The key forces are sector-specific complementarity between work-experience and labor, and exogenous technical progress present only in the modern sector. Using nationally representative micro data from the Socio-Economic Survey of Thailand (1976-1996), we measure the theory by estimating cross-sectional earnings functions, and assess if the model captures the observed dynamics of transition. The model jointly explains the gradual and S-shaped transition, stagnant growth of aggregate earnings, and the rise and fall of experience-earnings profiles in Thailand.

Keywords: Modern Transition, Sector-Specific Complementarity, TFP and Inequality

JEL Classification: O11, O47, J31, O15