Structural change, Engel's consumption cycles and Kaldor's facts of economic growth

Abstract

The process of economic development is characterized by fundamental changes in the structure 2 of production and employment. In historical perspective, the emergence of new and the 3 decline of old industries has led to a dramatic reallocation of resources between sectors of 4 production.1 Despite these huge structural changes, the long-term growth process has been 5 remarkably stable in the aggregate. As mentioned by Kaldor (1961) in his famous stylized 6 facts, a situation where the growth rate, interest rate, capital output ratio, and labor share 7 are constant over time is a reasonable approximation of the long-run growth experience of a 8 modern economy. 9Changes in the structure of production and employment result either from sectoral dif-10 ferences in productivity growth or from sectoral differences in income elasticities of demand. 11This paper focuses on the demand side. In this case, the structural transformation is driven 12 by changes in consumer demand as households get richer. In a poor society, the overwhelming 13 part of income is spent on basic goods, predominantly food. Consequently, the larger part for food, the latter relationship being known as "Engel's law". According to Houthakker 25 1 Maddison (1987) documents the huge reallocation of labor in six major industrialized countries (France, Germany, Japan, Netherlands, U.K. and U.S.). His data show that the average employment share in agriculture was as high as 46.0 % in 1870 and has decreased to 5.5 % by 1984. During the same period the average employment share in the service sector has increased from 26.4 % to 62.2 %.

Growth and Structural Transformation

“…Relative to the results that we derived previously about income changes and structural transformation, the specification of Foellmi and Zweimüller (2008) delivers balanced growth and structural transformation in a more robust manner, in the sense that it does not need a condition similar to (30) that imposes a restriction on the parameters of preferences and technology.…”

“…A different approach to generating effects from changes in income is Foellmi and Zweimüller (2008). Whereas our benchmark model implicitly aggregated individual consumption goods into three broad sectors and defined preferences over the amounts of the three resulting aggregates, these authors specify preferences over an unbounded mass of potential consumption goods.…”

“…But a limitation of the specification of Foellmi and Zweimüller (2008) is that modeling structural transformation at the level of individual goods does not provide much guidance for how to connect the model with data at the level of broad sectors. 26 Hall and Jones (2007) also develop a framework that can give rise to non-homothetic demand functions, though their focus is specifically on the rise of spending on health care, as opposed to the more general process of structural transformation.…”

“…Nonetheless this is of interest in the current context since increases in health care account for a significant part of the overall increase in the size of the service sector. In the basic model of Hall and Jones, utility in the 26 Buera andKaboski (2012a, 2012b) adopt a similar preference structure as Foellmi and Zweimüller (2008), except that they stress the introduction of new goods and adjustment along the extensive margin. Other aspects of their analysis are quite different, however.…”

“…They adopt a similar preference structure as Foellmi and Zweimüller (2008), but they assume that each service can only be consumed in the amounts of zero or one, so that increasing consumption will necessarily manifest itself along the extensive margin. From the consumer's perspective all services are symmetric.…”