Structural Change: Implications of Policy and other Barriers
Christopher A Pissarides
Centre for Economic Performance
London School of Economics
Presentation at Oxonia
10 May 2005
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Contents
This presentation is based on a joint project with Rachel Ngai of the London School of Economics, financed by the ESRC
Motivation for the study
Structural change and economic growth
Barriers to structural change
Policy implications
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Motivation
• Growth takes place at uneven rates across industrial sectors
• This usually gives rise to “structural change”
• Defined as the movement of labour and capital across industrial sectors
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• What are the implications of uneven growth for structural change when there are no frictions?
• What are the implications of mobility barriers and frictions?
• Is there evidence that policy or other barriers matter?
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Our Modelling Approach
• Economy consists of many distinct sectors
• Some produce final consumption goods (e.g. clothes and food)
• Some produce both consumption goods and capital or intermediate goods (e.g. manufacturing)
• And some production takes place at home (e.g., cleaning and ironing)
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• TFP growth is “unbalanced”: new technology is not uniformly spread across industrial sectors
• We claim that unbalanced TFP growth is the cause of structural change
• When does structural change take place and how?
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Nature of structural change
• Structural change requires non-unitary income or price elasticities
• Otherwise differences in TFP growth rates are absorbed by prices
• Our model implies unit income elasticities, so structural change is due to non-unitary price elasticities
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• Formally, we have
– constant elasticity of substitution utility functions defined over consumption goods (and leisure)
– Cobb-Douglas production functions in all sectors
– one aggregate capital good allocated to all sectors
– fixed labour force allocated to all sectors
– or, fixed total annual hours allocated to market work, home work and leisure
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Implications
• If consumption goods are not close substitutes (elasticity of substitution less than 1)
labour moves to sectors with low TFP growth
prices of goods with low TFP growth rise
real consumption shares are approximately constant
There is a limiting state with only two sectors, the slowest growing consumption sector and the capital-producing sector
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• These are more of less the implications of Baumol’s 1967 classic “Unbalanced Growth” model:
labour moves to stagnant sectors
stagnant sectors suffer from “Baumol’s cost disease”
economy’s growth path is on a declining trend
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• But crucially, we show that without mobility barriers economy is on a steady-state growth path
• Growth rate equal to the rate of growth of the capital-producing sector
• If there are mobility barriers structural change is slower and aggregate growth rate not strictly constant
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Parameter restrictions
• Elasticity of substitution across broad sectors, e.g., two-digit industries, less than 1 (their products are poor substitutes), e.g.,
– Food, clothes, TV sets
• But elasticity of substitution within commodity groups is 1 or bigger, e.g.,
– whether you use electronic means to store information or paper means
– whether you eat at home or go to restaurant
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Implications
• At the two-digit level or broader
– labour share of slow-growing consumption sectors is expanding
– labour share of fast-growing consumption sectors is contracting
– labour share of capital goods production converging to investment share of output
– real consumption shares approximately constant
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• Within narrower groups,
– Labour share of fast TFP-growth sectors
expanding, e.g., ICT, types of cloth sold
– Home production time declining if market
technology grows faster than home
technology
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Employment flows during structural change
Total Consumption
Manufacturing(high TFP growth)
Services(low TFP growth)
Agriculture(high TFP growth)
Market(higher TFP growth)
Home(lower TFP growth)
Higher TFP growthSub-sector
(e.g., emailing)
Lower TFP growthSub-sector
(letter delivery) Labour flow
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International trade
• Tradable goods have good substitutes across nations
• Hence, fast TFP-growth sectors producing tradable goods may retain or attract labour share
• Provided they grow faster than international competitors
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Barriers to economic activity
• Two types, mobility barriers and taxation-regulation of activities
• Effect of mobility barriers temporary but because structural change is ongoing, they last for a very long time
• Effects of regulation-taxation may persist indefinitely
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Taxation-regulation
• Taxation-regulation of market activity drives
work hours to the home
• It affects mainly market sectors that are close
substitutes to home production (e.g., services)
• May explain some of the gap across nations in
employment rates, especially in services
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Taxation-regulation and TFP
• Think of taxation-regulation as having opposite
effect of TFP
• Prescott and Rogerson ask, can it explain the
difference between US and EU employment
rates?
• Main differences should be in women’s
employment and in services
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• “Reverse engineering” exercises: difference in employment rates can be explained by a 40% effective shortfall in European TFP.
• Given the much smaller measured shortfall, rest is attributed to taxation-regulation
• But this concerns level of TFP and substitutions between home/market
• Does not need dynamics
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• Except that over time, if TFP growth in market is higher than in home, effect of taxation-regulation should be getting smaller as home hours fall
• So eventually negative implications of taxation should be diminishing
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Mobility barriers
• For capital: the cost of closing down businesses in contracting sectors and setting up businesses in new sectors
• For labour: policies that inhibit mobility, e.g., social security, housing, etc.
• Education, training, “lifelong learning” facilities, “adaptability”
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Implications
• Barriers to closing down jobs and businesses likely to slow down structural change
• But are likely to be less important than barriers to expansion in new sectors, because the normal turnover of labour eventually allows decline
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• Therefore mobility barriers are likely to have bigger impact on expanding sectors than on contracting sectors
• There should be more unemployment in growth equilibrium
• Less job creation in services and other expanding sectors
• For example, less fast uptake of ICT production
• More home production
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Data
• In the process of compiling summary institutional data on barriers
• I give the ranking of countries on the basis of barriers to entrepreneurship, very similar to ranking on the basis of employment protection legislation
26
Ranking of countries:Admin burden on start-ups
1 Denmark 11 Finland2 US 12 Portugal
3 UK 13 Japan
4 New Zealand 14 Greece
5 Ireland 15 Austria
6 Australia 16 Germany
7 Sweden 17 Belgium
8 Canada 18 Spain
9 Netherlands 19 France
10 Norway 20 Italy
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More on data
• Data on 2-digit sectors but for the next set of graphs aggregated into five sectors
1. Agriculture and mining
2. Manufacturing
3. Other production industries
4. Business services
5. Personal services (including government)
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Model implications I
TFP growth in agriculture and manufacturing higher than in services
Employment share of agriculture falls towards 0
Share of manufacturing falls towards investment rate without trade
With trade it may rise or remain above investment rate
Share of services rises towards consumption rate
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United States
0%5%
10%15%20%25%30%35%40%45%50%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
empl
oym
ent s
hare
s
AGR PRO MAN BUS SER PER SER
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Great Britain
0%
10%
20%
30%
40%
50%
60%19
71
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
empl
oym
ent s
hare
s
AGR PRO MAN BUS SER PER SER
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Germany
0%
5%
10%15%
20%
25%
30%35%
40%
45%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
empl
oym
ent s
hare
s
AGR PROD MAN BUS SER PER SER
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France
0%5%
10%15%20%25%30%35%40%45%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
empl
oym
ent s
hare
AGR PROD MAN BUS SER PER SER
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Italy
0%5%
10%15%20%25%30%35%40%45%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
empl
oym
ent s
hare
s
AGR PRO MAN BUS SER PER SER
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Japan
0%5%
10%15%20%25%30%35%40%
empl
oym
ent s
hare
s
AGR PRO MAN BUS SER PER SER
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TFP growth in the market higher than in the home
Female employment should be rising
Model implications II
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Gender employment gaps
0%
10%
20%
30%
40%
50%
60%
IT Ggap US Ggap UK Ggap FR Ggap GE Ggap
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More mobility barriers
Share of services lower
Share of manufacturing out of working age population falling but share of services not rising fast enough to compensate
Unemployment rate higher
Employment-to-population rate lower
Model implications III
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Manufacturing employment share of WAP
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
US
UK
FR
IT
JA
GE
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Service share of WAP
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
US
UK
FR
IT
JA
GE
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Employment share of services
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
US
UK
FRGE
IT
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Implications of last three charts
• Manufacturing share in working age population converging
• Service share not converging
• Therefore, net transfer of working time from manufacturing share to out of the labour force
• Barriers affect job creation in services adversely, which translates to lower overall employment
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Services share of WAP vs. barriers, 17 countries
R2 = 0.7027
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
0 5 10 15 20
barriers rank
serv
ice/w
ap
sh
are
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Manufacturing share of WAP vs. barriers
R2 = 0.0004
0.1
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0 5 10 15 20
barriers rank
man
/wap
sh
are
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Service share vs rank of barriers, 17 countries
R2 = 0.3211
50
55
60
65
70
75
80
0 5 10 15 20
barriers rank
serv
ice
emp
loym
ent
shar
e
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Gender employment gap vs. barriers rank
R2 = 0.3293
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0 5 10 15 20barriers rank
ge
nd
er
ga
p
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Is service share the only problem for women?
• Very preliminary – US service expansion seems to be creating more jobs for women than expansion of service share in Europe
• Justified by our claim that barriers, in addition to slowing down convergence, drive production to the home
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Service employment share and women’s employment 1970-2000
20%
30%
40%
50%
60%
70%
80%
40% 50% 60% 70% 80%service employment share
fem
ale
em
plo
ym
en
t ra
te
US
GE
FR
UK
IT
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Conclusions I
• Normal process of economic development requires structural change because of unbalanced TFP growth
• Delaying the process (sometimes called “deindustrialisation”) harmful
• May temporarily hold average TFP growth up but eventually structural change will dominate
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Conclusions II
• Low female employment in countries like Italy and Spain seem to be associated with high barriers to change
• Low service employment share also symptom of barriers
• Barriers have bigger impact on expanding service share than on contracting manufacturing share