Structural Transformation and the Volatility of Aggregate Output in OECD Countries

February 15, 2013

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Format: Chicago

Constant A Lonkeng Ngouana. Structural Transformation and the Volatility of Aggregate Output in OECD Countries, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Economic growth, Economic sectors, Employment, Labor, Labor productivity, Production, Services sector, Structural transformation

Keywords: Aggregate output, Aggregate output growth, Aggregate output volatility, Dynamic general equilibrium, Employment, Employment share of the service sector, Global, Growth differential, Indivisible labor, Indivisible labor model, Labor productivity, OECD, Output volatility, Reallocation in OECD country, Reallocation in the model, Reallocation of labor, Sectoral labor productivity processes, Sectoral labor reallocation in OECD country, Service sector, Service sector employee, Service sector's labor share, Services sector, Structural transformation, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/043
Stock No:

WPIEA2013043
ISBN:

9781475548716
ISSN:

1018-5941

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