Structural Transformation and the Volatility of Aggregate Output in OECD Countries

Constant Lonkeng Ngouana ()

No 2013/043, IMF Working Papers from International Monetary Fund

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: WP; service sector; aggregate output; Dynamic general equilibrium; Indivisible labor; Labor productivity; OECD; Output volatility; Structural transformation; growth differential; aggregate output volatility; indivisible labor model; reallocation of labor; service sector employee; sectoral labor reallocation in OECD country; aggregate output growth; service sector's labor share; employment share of the service sector; sectoral labor productivity processes; reallocation in OECD country; reallocation in the model; Services sector; Employment; Global (search for similar items in EconPapers)
Pages: 29
Date: 2013-02-15
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Citations: View citations in EconPapers (3)

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