Multi-sector Growth Model Research Articles

Das House Kapital: A Long-Run Theory of House Prices and Housing Wealth

Abstract Over the last 70 years, many advanced countries have experienced growing real house prices and an increasing housing wealth-to-income ratio. To explain these long-run patterns, this paper introduces a novel multi-sector growth model where housing services are produced using non-reproducible land and reproducible structures. Land is also employed in the non-housing sector. First, we identify two fundamental mechanisms driving the long-run increase in the real house price: (i) technological progress in the construction sector lags behind the technological progress of the rest of the economy and (ii) housing production is more land-intensive than non-housing production. Second, we study transitional dynamics for the US, UK, France, and Germany. Our calibrated model explains most of the observed increase in the housing wealth-to-income ratio since 1950. Counterfactual experiments identify initially low stocks of residential structures and non-residential capital as key exogenous drivers for this increase. The associated investment incentives led to a long-lasting construction boom and steadily increasing land scarcity, boosting residential land prices.

Time Scales of the Low-Carbon Transition: A Data-Driven Dynamic Multi-Sector Growth Model

Abstract This paper employs a dynamic multi-sector growth model with changing technology to study the relevance of the price and quantity dimensions involved in the technical substitution of carbon-intensive technology, that is, the low-carbon transition. For the framing of the transition, the stylized market dynamics by Flaschel and Semmler (1987. “Classical and Neoclassical Competitive Adjustment Processes.” The Manchester School 55 (1): 13–37) are used, who propose a cross-dual out-of-equilibrium adjustment process. The major empirical challenge to identify the adjustment speed for quantities and prices is to empirically estimate sector-specific adjustment coefficients. The transition speed is estimated for seven carbon-intensive sectors in six high-income economies (Germany, France, Italy, Netherlands, Japan, and the US) using a mixed-effects varying-slopes model on EU KLEMS data. Directed technical change is enforced by a revenue-neutral, pro-active fiscal policy of a tax–subsidy form, which has the effect to greatly accelerate the phase-out of carbon-intensive technology and the phase-in of green technology. The speed of green substitution that allows decarbonization is then evaluated analytically and computationally along four policy and time dimensions: cost advantage, a percentage tax on carbon-intensive output, a green subsidy rate, and initial investment ratios. Though the tax itself has an impact on the speed of decarbonization, it is significantly improved by green subsidies and green investments. The cost advantage of the green over the carbon technology is shown to have a negligible impact on decarbonization speed by itself. Without ambitious fiscal policy, especially in the form of green investment support, this substitution process appears to be too slow to reach decarbonization in a timely manner.

Structural change and productivity growth in Europe — Past, present and future

This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizeable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.

Foreign Aid and Fiscal Policy in a Small-Open Economy with a Non-Market Sector

This study examines the macroeconomic effects of foreign aid and fiscal policy by employing a multi-sector growth model. Foreign aid may decrease the recipient country’s market activities by lowering its capital accumulation and shifting market labour and capital to the non-market sector. This market activity shifting can improve the recipient country’s foreign asset/debt position where real exchange rate plays a role. We examine fiscal policies’ long- and short-run impacts and the recipient country’s administration efficiency in handling aid. Efficiency improvements in the recipient country’s governance of foreign aid can lower its real exchange rate, thereby contribute to improving foreign asset/debt holdings. Although administration costs in foreign aid may cause losses, by raising both market and non-market goods consumption, foreign aid improves the welfare of the recipient country. Our numerical analysis demonstrates the comparative statics and comparative dynamics impacts of several fiscal policy experiments. We illustrate that capital and labour income’s taxation effects can be very different.

Agricultural composition and labor productivity

Labor productivity differences between developing and developed countries are much larger in agriculture than in non-agriculture. We show that differences in agricultural composition across countries explain a substantial part of these labor productivity differences. To this end, we group agricultural products into two sectors: capital-intensive and labor-intensive agriculture. As the economy develops and capital accumulates, the price of labor-intensive agricultural goods relative to capital-intensive agricultural goods increases. This price change drives a process of structural change that moves land and farmers to the capital-intensive sector, increasing labor productivity in agriculture. We illustrate this mechanism using a multisector growth model that generates transitional dynamics consistent with patterns of structural change observed in Brazil and also differences in agricultural composition and labor productivity consistent with cross-country data.

Structural Change and Productivity Growth in Europe - Past, Present and Future

This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.

Structural change and cumulative causation: A Kaldorian approach

AbstractThis paper presents a multisectoral model based on Kaldor's approach to explain the importance of structural change and cumulative causation. Divergence in countries' growth rates in Kaldorian models are explained either by different degrees of increasing returns among sectors on the supply side or by different income elasticities of exports and imports on the demand‐side, but it is not explained by both factors together. In this vein, a multisector growth model that combines different sectoral income elasticities and different sectoral increasing returns is built to explain how structural changes toward high‐tech industries can trigger a process of cumulative causation and ensure higher growth rates in the long run.

Malthus in the light of climate change

Abstract To reconsider the Malthusian predictions of natural limits to economic development, the paper develops a multi-sector growth model with exhaustible resource extraction, investments in physical and knowledge capital, climate change, and endogenous fertility. Economic growth is driven by endogenous innovations which increase in the availability and productivity of research labour. Poor substitution of natural resources triggers sectoral change. Climate change is the result of polluting resource use which is, like consumption and investments, based on the intertemporal optimization of the households. Highlighting the importance of bounded resource supply and of rational extraction decisions I show that climate change is independent of population growth in steady state and there is no causal relationship between climate and population during transition to steady state. The consumption per capita growth rate rises in the innovation rate and the output elasticities of labour and capital in the different sectors. Unlike climate policy, population policy is not warranted; it may be counterproductive because labour is crucial for the research sector.

A Study of the Impact of Innovation on Industrial Upgrading in China: A Spatial Econometric Analysis Based on China’s Provincial Panel Data

This study provides an in-depth analysis of the impact of innovation on industrial upgrading from theoretical and practical perspectives. In terms of theory, based on the endogenous growth theory model, a multi-sectoral growth model is constructed to portray the inherent logical connection between innovation and industrial structure upgrading. The results show that innovation has an important impact on industrial structure upgrading. Industrial structure upgrading depends on differences in innovation level among industries and the substitution relationship of finished products in the industry. From an empirical perspective, based on the panel data of 31 provinces in China from 2005 to 2017, the spatial effect of innovation on industrial upgrading was analyzed using the spatial Durbin model. The results show that innovation and industrial structure upgrading has significant spatial correlation effects, and regional innovation can drive China’s industrial upgrading. Meanwhile, the space spillover effect is an important factor that cannot be ignored in industrial upgrading.

Leisure time and the sectoral composition of employment

We observe the following patterns in the US economy during the period 1965-2015: (i) the rise of the service sector, (ii) the increase in leisure time, and (iii) the increase in recreational services. To show the last pattern, we measure the fraction of the value added of the service sector explained by the consumption of recreational services and we show that it increases during this period. We explain these three patterns of structural change in a multisector growth model in which leisure time increases with income. As a consequence, the consumption of recreational services increases since they are consumed during leisure time. We show that the introduction of recreational services contributes to explain the rise of the service sector, inequality in leisure, and employment differences across countries caused by differences in income taxes.

A Two-Sector Model of Economic Growth with Endogenous Technical Change and Pollution Abatement

We provide insights into the relationships between technological development, economic growth, and pollution accumulation using a two-sector model of economic growth with endogenous technical change. In the model, output is produced using a polluting resource. Production can be used for either consumption or abatement of pollution. Scientists can be allocated between two research activities: resource-saving and abatement-augmenting technologies. Our results indicate conditional path dependency. Specifically, when the innovative capacity in the resource-saving research sector is sufficiently high, scientists are allocated to improve only the resource-saving technology, independently of the state of the technologies and environment. Consequently, the allocation of researchers is path-independent. When the innovative capacity in the abatement-augmenting research sector is sufficiently high, the optimal allocation of researchers depends on the initial level of the pollution stock or technologies but eventually will be directed to improve the abatement technology. We further characterize the optimal steady-state and off-steady-state dynamics and show that green growth is always socially optimal. By using a two-sector model, we address a lack of attention to multi-sector growth models in neoclassical growth theory and show that distinct results and transitional dynamics can emerge.

Growth and the Kaldor Facts

We revisit the Kaldor growth facts for the United States and the United Kingdom during the postwar period. We find that while overall the original Kaldor facts continue to hold, deviations occurred along several dimensions: Instead of staying constant, the growth rates of real GDP per worker and of real capital per worker have slowed down in the United States and the United Kingdom since the 1970s, the capital-to-output ratio has increased in the United Kingdom, and the share of income paid to labor has decreased in the United States since 1990. We discuss how to calculate the Kaldor facts in multi-sector growth models and establish that a slowdown in GDP-per-worker growth naturally results from secular changes in relative prices.

Agricultural Composition and Labor Productivity

Labor productivity differences between developing and developed countries are much larger in agriculture than in non-agriculture. We show that cross-country differences in agricultural composition explain a substantial part of labor productivity differences. To this end, we group agricultural products into two sectors that are differentiated only by capital intensity. As the economy develops and capital accumulates, the price of labor-intensive agricultural goods relative to capital-intensive agricultural goods increases. This price change drives a process of structural change that shifts land and farmers to the capital-intensive sector, increasing labor productivity in agriculture. We illustrate this mechanism using a multisector growth model that generates transitional dynamics consistent with patterns of structural change observed in Brazil and other developing countries, and with cross-country differences in agricultural composition and labor productivity. Finally, we show that taxes and regulations that create a misallocation of inputs within agriculture also reduce the relative labor productivity.

Malthus in the Light of Climate Change

To reconsider the Malthusian predictions of natural limits to economic development, the paper develops a multi-sector growth model with exhaustible resource extraction, investments in physical and knowledge capital, climate change, and endogenous fertility. Economic growth is driven by endogenous innovations which increase in the availability and productivity of research labour. Poor substitution of natural resources triggers sectoral change. Climate change is the result of polluting resource use which is, like consumption and investments, based on the intertemporal optimization of the households. Highlighting the importance of bounded resource supply and of rational extraction decisions I show that climate change is independent of population growth in steady state and there is no causal relationship between climate and population during transition to steady state. The consumption per capita growth rate rises in the innovation rate and the output elasticities of labour and capital in the different sectors. Unlike climate policy, population policy is not warranted; it may be counterproductive because labour is crucial for the research sector.

Kuznets meets Lucas: structural change and human capital

Abstract This paper develops a multi-sector growth model with human capital accumulation. In this model, human capital induces structural change through two channels: changes in relative prices and changes in the investment rate of physical and human capital. We show that the specifications of the model give rise to a generalized balanced growth path (GBGP). Furthermore, We show that the model is consistent with (i) the decline in agriculture, (ii) the hump-shaped of manufacturing, (iii) the rise of the services sector, and (iv) the path of human capital accumulation in the US economy during the 20th century. Given the findings, We outline that imbalances between physical and human capital contribute to explain cross-country differences in the pace of structural change.

Romer meets Kongsamut–Rebelo–Xie in a nonbalanced growth model

To explain the newly found empirical relationship between human capital accumulation and structural change, the paper introduces Romer (1990)’s endogenous technological change into the multi-sector growth model pioneered by KRX (1997, 2001), and shows that an increase in the level of human capital accelerates the structural transformation of the economy, while the incremental effect of human capital on structural change is smaller at higher levels of human capital. The theoretical results of the combined model matches the empirical findings very well.

Dilution effects, population growth and economic growth under human capital accumulation and endogenous technological change

This paper answers the following two questions: (1) In the data, do we find a dilution effect of population growth also on per-capita human capital investment? If yes, (2) How can we use this observation to explain theoretically the existence of a differential impact of population change on economic growth across countries? In the first part of the article we document empirically considerable cross-country heterogeneity of a dilution effect of population growth with regards to the process of per-capita human capital formation. And we observe that, depending on the dilution effect observed in a given country, population growth may be relevant — either positively or negatively — for economic growth. In the second part of the paper we use these results to build a multi-sector growth model which, by allowing for a country specific dilution effect of population growth on per-capita human capital formation, is capable of accounting for the non-monotonous correlation between demographic and economic growth rates in the long-run.

Marx’s reproduction schemes and multi-sector growth models

This paper provides a critical discussion of Marx’s analysis of simple reproduction, of reproduction on an extended scale, and of the transition from simple to extended reproduction. It challenges various interpretations of Marx’s analysis based on steady-state growth models. By referring to Marx’s original manuscripts on the reproduction schemes, the paper shows that Marx, due to erroneous calculations, never arrived at schemes of reproduction on an extended scale that exhibit steady-state growth. Moreover, it is suggested that Marx identified reproduction on an extended scale with an expansion path of undisturbed capital accumulation, irrespective of whether the latter proceeds in a steady or non-steady manner.

Structural changes and growth regimes

We study the relation between income distribution and growth, mediated by structural changes on the demand and supply sides. Using the results from a multi-sector growth model, we compare two growth regimes that differ in three aspects: labour relations, competition and consumption patterns. Regime one, similar to Fordism, is assumed to be relatively less unequal, more competitive and to have more homogeneous consumers than regime two, which is similar to post-Fordism. We analyse the parameters that define the two regimes to study the role of the economy’s exogenous institutional features and endogenous structural features on output growth, income distribution, and their relation. We find that regime one exhibits significantly lower inequality, higher output and productivity and lower unemployment compared to regime two, and that both institutional and structural features explain these differences. Most prominent amongst the first group are wage differences, accompanied by capital income and the distribution of bonuses to top managers. The concentration of production magnifies the effect of wage differences on income distribution and output growth, suggesting the relevance of competition norms. Amongst structural determinants, firm organisation and the structure of demand are particularly relevant. The way that final demand is distributed across sectors influences competition and overall market concentration; demand from the least wealthy classes is especially important. We show also the tight linking between institutional and structural determinants. Based on this linking, we conclude by discussing a number of policy implications that emerge from our model.

Structural Transformation of India: A Quantitative Analysis

This article accounts for the structural transformation of the Indian economy over the recent decades. Empirical estimates imply a relatively higher elasticity of substitution in services than in manufacturing, while the growth rates of labour-augmenting productivity in both of these sectors are of similar magnitude, in contrary to what previous growth accounting exercises suggest. Simulation of a multi-sectoral growth model with these estimates succeeds in replicating the trends of sectoral value-added shares as well as the declining labour shares of value added in manufacturing and services sectors during the sample period. The model improves on previous studies in matching the trends of sectoral shares of employment. Thus, the services sector’s flexibility in factor substitution compared to that of manufacturing can explain, at least in part, the rapid growth of services in the recent period.JEL Classification: O11, O41, O53