Structural Change and Income Differences

Economic growth and development is intimately related to the decline of agriculture's share of output and employment. This process of structural change has important implications for income and productivity differences between regions within a country or between countries themselves. Agriculture typically has low productivity relative to other sectors and this is particularly true in poor areas. So, as labour switches to nonagricultural activities or as agricultural productivity increases, poor agriculturally-intensive areas will benefit the most. In this thesis, I contribute to a recent and growing line of research and incorporate a separate role for agriculture, both into modeling frameworks and data analysis, to examine income and productivity differences. I first demonstrate that restrictions on trade in agricultural goods, which support inefficient domestic producers, inhibit structural change and lower productivity in poor countries. To do this, I incorporate multiple sectors, non-homothetic preferences, and labour mobility costs into an Eaton-Kortum trade model. With the model, I estimate productivity from trade data (avoiding problematic data for poor countries that typical estimates require) and perform a variety of counterfactual exercises. I find import barriers and labour mobility costs account for one-third of the aggregate labour productivity gap between rich and poor countries and for nearly half the gap in agriculture. Second, moving away from international income differences, I use a general equilibrium model of structural transformation to show a large labour migration cost between regions of the US magnifies the impact improved labour markets have on regional convergence. Finally, I estimate the influence of structural change on convergence between Canadian regions. I construct a unique dataset of census-division level wage and employment levels in both agriculture and nonagriculture between 1901 and 1981. I find convergence is primarily due to region-specific factors with structural change playing little role.