Productivity Growth and Structural Change in an Economy with Capital Accumulation

This paper develops a two-sector neoclassical growth model to study structural transformation where labor and capital are reallocated out of agriculture. We find that advances in farming technology create a spillover of resources, pushing labor and capital out of agriculture. Non-agricultural productivity growth leads to capital formation in both sectors, and capital attracts labor due to complementarity. The agriculture share of labor and capital declines when capital is more elastic in the non-farm sector. Our quantitative analysis shows that productivity growth in both farm and non-farm sectors contributed significantly during the U.S. structural trans- formation for the period 1869–2011. We then extend the model to explore potential distortions and policies that may retard or fuel the transition.