The growth rate of labor in the nonagricultural sector is completely determined

The growth rate of labor in the nonagricultural

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with an exogenously given process for labor. The growth rate of labor in the non–agricultural sector is completely determined by the exogenous growth rate of labor productivity in the mod- ern agricultural sector. Since all countries have the same output of agriculture, cross–country di ff erences in aggregate output are entirely driven by di ff erences in non–agricultural output. Several implications follow. First, countries that use the modern technology in agriculture but have low productivity in it will have to devote more labor to agriculture. This leads to less labor, and capital, in non–agriculture, and hence to less aggregate output. Given the observed di ff erences in the share of labor that is allocated to agriculture, Gollin et al. (2002) show that this mechanism can account for a large part of the cross–country di ff erences in aggregate output. This is interesting because in their model the only di ff erence across countries is the level of productivity of agriculture. Second, assuming that productivity growth rates are constant over time, the model necessar- ily implies that transition dynamics will be long–lived, thereby addressing a point emphasized by King and Rebelo (1993) that in a standard one–sector growth model transition to the steady state capital level is rapid. 45 This point does not carry over to the two–sector model because labor allocated to the non–agricultural sector only slowly converges to its asymptotic level. Third, the model implies that in a closed economy setting advances in agricultural productivity are a precondition for growth. This view was a central argument of Schultz (1953), and figured prominently in later contributions by Johnston and Mellor (1961), Johnston and Kilby (1975), and Timmer (1988), among others. More recently, it has taken a central state in the writing of non–economists such as Diamond (1997). 46 Laitner (2000) considers a similar framework as Gollin et al. (2002) but focuses on a di ff er- 45 Chang and Hornstein (2011) make a related point about Korea. They show that two modifications of the one– sector growth model are essential to account for the long–lived transition dynamics since 1960 during which Korea continued to accumulate capital. The first one is to distinguish between agriculture and non–agriculture and to take into account that Korean agriculture used relatively little physical capital. The second essential modification is to model that the relative price of capital remained high during most of the transition dynamics. 46 See Ti ffi n and Irz (2006) for a recent empirical assessment. 78
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ent issue. He notes that in the time series data there is evidence of an increase in savings rates early in the industrialization process. Whereas some have argued that the increase in savings rate is the driving force behind the industrialization process, Laitner shows that, in a model of structural transformation, this apparent increase in savings rate is simply an artifact of how NIPA measures saving. Early in the development process most labor is employed in agriculture,
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