Does growth cause structural change, or is it the other way around? A dynamic panel data analysis for seven OECD countries

Abstract

In economic development, aggregate economic growth is accompanied by structural change among the three main sectors of an economy. Nevertheless, the question whether economic growth causes structural change, or changes in the economic structure cause aggregate growth is still unanswered. To shed more light on this question, this article examines a Granger causality test in a panel environment to determine the relationship of economic growth and structural change, measured either in terms of employment shares or real value added shares. Estimation and analysis of the annual data of seven OECD countries, covering the period from 1960–2004, show that although the causality appears to be heterogeneous among these countries, some general conclusions can be drawn. Aggregate economic growth decelerates structural change in the very short run but accelerates it with some lag in time. The aggregate effect depends on whether structural change is measured in terms of employment or in terms of real value added. Conversely, structural change supports aggregate economic growth, irrespective of which measure of structural change chosen.