Three-sector Model Research Articles

Labour reallocation, productivity growth and dualism: The case of China

Building upon Temple and Wöβmann (2006), we propose a three-sector model to identify the role of labour reallocation to the growth of total factor productivity (TFP) in China since the 1980s. Based on System Generalized Methods of Moments (GMM) dynamic panel data models and a newly-developed provincial human capital stock dataset, our results show that labour reallocation from agriculture to rural non-agriculture is more important than the urban counterparts to output growth and that this effect is more evident in coastal areas of China. Implications of structural transformation for other populous developing economies are discussed.

Approximating multisector New Keynesian models

A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.

Approximating Multisector New Keynesian Models

A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.

Trade, Reform, and Structural Transformation in South Korea

We develop a two-country, three-sector model to quantify the effects of Korean trade policies for structural change from 1963 through 2000. The model features non-homothetic preferences, Armington trade, proportional import tariffs and export subsidies, and is calibrated to match sectoral value added data on Korean production and trade. Korea’s tariff liberalization increased imports and trade, especially agricultural imports, accelerating de-agriculturalization and intensifying industrialization. Korean subsidy liberalization lowered exports and trade, especially industrial exports, attenuating industrialization. Thus, while individually powerful agents for structural change, Korea’s tariff and subsidy reforms offset each other. Subsidy reform dominated quantitatively; lower trade, higher agricultural and lower industrial employment shares, and slower industrialization were observed than in a counterfactual economy with no post-1963 policy reform.

Approximating Multisector New Keynesian Models

A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.

The Wise Use of Leisure Time. An Endogenous Growth Model With Leisure Services

In this paper, starting from the Uzawa-Lucas endogenous growth framework with production of physical and human capital, we develop and investigate a model with an additional sector for the production of leisure services. In turn, our three-sector model builds on and extends Ladron-de Guevara et al. [1999] - where the utility function depends only on consumption of physical goods and on ‘pure’ leisure - by introducing consumption of leisure services. As the latter is a time- consuming activity, the model also generalizes the standard time allocation problem, in that total available time can be allocated among work, education, purely free time and leisure activities in our framework. We characterize analytically the Balanced Growth Paths of this general model, particularly in terms of time allocation and growth. We carry out a comparative analysis across different Service Economies that are supposed to be at their equilibrium, including an ‘Industrial Economy’ without service sector, as well across possibly multiple equilibria of the same economy. Part of the analysis is based on an intuitive yet rigorous framework for determining and representing Balanced Growth Paths in the space of time allocation decisions.

STRUCTURAL CHANGE AND A CONSTANT GROWTH PATH IN A THREE-SECTOR GROWTH MODEL WITH THREE FACTORS

This study proposes the unified framework of a three-sector model with structural change where agriculture, manufacturing, and service sectors have different production technologies. All three sectors use the factors of capital, labor, and land as inputs. The constant-growth path (CGP), which is the trajectory along which the rental rate of capital remains constant, is used to reconcile the Kaldor and Kuznets facts, and plays a role in linking the wage rate and land rent in the three-factors model. Because the prices of agricultural goods and services are determined endogenously, the CGP condition is no longer the knife-edge condition. We find that the dynamic system along the CGP in the three-sector, three-factor model corresponds to the standard two-sector optimal growth model.

Can the information technology revolution explain the incidence of co-movement of skill premium and stock prices?

We investigate for a long-run relationship between skill premium and stock prices by using the panel cointegration tests for six OECD countries. A cointegrating relationship is observed in the panel data for the period 1984–2005. The evidence for co-movement of skill premium and stock prices is also found in the US data. Next, we develop a three-sector model to explain this co-movement. We demonstrate that technological revolution not only widens the skilled–unskilled wage gap, but also increases firms' profit and, thus, higher stock prices. Finally, we calibrate our model to the US data for the Information Technology revolution that happened in the 1980s and demonstrate that our model can moderately explain the data. Our model concludes that, unless any further revolutionary surge in productivity of the R&D sector happens, the skill premium will augment no more and stock prices will register no further unusual growth.

Zwei Erzählungen regionaler Entwicklung in Süddeutschland – vom Sektorenmodell zum Produktionssystem

Two narratives of regional development in Southern Germany - from the three-sector model to the production system. The ongoing regional economic change from industry to services employment has long been framed from the perspective of the three-sector model established by Clark, Fisher and Fourastié. While the repeatedly found regularity between service employment and economic growth seems in favour of the model, this paper demonstrates its conceptual and empirical limits. Theoretically, it deploys the approach of the production system to replace an understanding of separate and independent sectors by a perspective of interdependent roles of divided labor. Methodologically, we borrow the distinction of four functional roles - production, circulation, distribution and regulation - and improve existing methodologies to assign these roles to regional economies. We use both models to capture the regional economic change over a period of fifteen years in Southern Germany. Although the evidence seems to confirm the three-sector model, the comparative approach conveys its falsity in understanding economic growth: Regional value creation is not a function of services per se but of the interplay between manufacturing and business services (circulation). The observations that regions with lopsided service growth in distribution fall behind regional growth, and that even rural regions pertaining to strong specializations in manufacturing run ahead of economic growth, are clearly incongruous with the three-sector model. We conclude that the production system concept is a theoretically richer and empirically more valid approach to understand regional development as duality of production and circulation rather than dualism of manufacturing and services.

Self-similar measures in multi-sector endogenous growth models

We analyze two types of stochastic discrete time multi-sector endogenous growth models, namely a basic Uzawa–Lucas (1965, 1988) model and an extended three-sector version as in La Torre and Marsiglio (2010). As in the case of sustained growth the optimal dynamics of the state variables are not stationary, we focus on the dynamics of the capital ratio variables, and we show that, through appropriate log-transformations, they can be converted into affine iterated function systems converging to an invariant distribution supported on some (possibly fractal) compact set. This proves that also the steady state of endogenous growth models—i.e., the stochastic balanced growth path equilibrium—might have a fractal nature. We also provide some sufficient conditions under which the associated self-similar measures turn out to be either singular or absolutely continuous (for the three-sector model we only consider the singularity).

The Political Economy of Trade and International Labor Mobility

We explore the political economy of trade and migration policies in several models of international trade. We show that in a Ricardian world, free trade and no international labor mobility is a Nash equilibrium outcome, but free trade and free international labor mobility is not. The result holds under different assumptions about the set of goods, preferences and the number of countries. An analogous result also holds in multifactor economies such as: a version of the standard two-sector Heckscher-Ohlin model, the Ricardo-Vinner specific factors model, and a three-sector model with a non-tradeable sector. We also study three extensions of our model in which free trade and at least partial labor mobility is a Nash equilibrium outcome. One extension introduces increasing returns to scale. Another an extractive elite. Finally, we allow the recipient country to charge an immigration fee in the form of an income tax and distribute the proceeds among domestic workers, which induces a Pareto improvement for the global economy.

A geometrical approach to structural change modelling

A large body of research has studied structural change, particularly the dynamics of labour allocation in multi-sector growth models, based on different economic theories. We present a meta-model of structural change that combines information from empirical evidence (stylized facts) with information on the geometrical properties of typical trajectories studied in structural change theory. In particular, our approach is based on three facts: (1) structural change in three-sector models is defined on a 2-simplex; (2) the trajectory of past structural change partitions the 2-simplex into economically interpretable sections; (3) the typical properties of structural change trajectories (e.g. non-self-intersection) prohibit some movements from one section to another. Jointly, these facts imply that structural change is path-dependent and that the number of feasible structural change scenarios can be reduced significantly. While we focus on labour allocation dynamics, our approach can be applied to other topics (e.g. income distribution dynamics).

Economy-wide impacts of REDD when there is political influence

National-level strategies for reducing emissions from deforestation and degradation (REDD), financed by international transfers, have begun to emerge. A three-sector model is developed to explore the economy-wide effects of two policies implemented by a government participating in REDD that differ in how they bring together incentives and benefit sharing: an incentive payment scheme where these are intrinsically linked and taxes where they are separated. Two sectors utilise forest as an input to production, one in which forest is substitutable for labour, producing a carbon externality, and one in which forest and labour are complements and where forest is used sustainably. Two important effects determine model outcomes. First, the government factors in general equilibrium effects when determining the efficient payment level. This implies that the level of international transfers is not fully passed through to the forest-using sectors. Second, even though the sustainable sector receives no incentive payment it can increase in size through the effect of REDD payments on markets. With political influence, where incentives and benefit sharing are linked the forest-using sectors may lobby for lower payment rates for themselves in order to create a larger international transfer. Where there is a separation between incentives and benefit-sharing this effect disappears. The findings indicate that REDD may be less cost-effective than envisioned at the international level.

Structural Transformation Under Trade Imbalances: The Case of the Postwar U.S.

A striking feature of the structural change literature is that, even though the U.S. economy is often used as a benchmark for calibration, the traditional models cannot account for the steep decline in manufacturing and rise in services in the United States since the late 1970s (Buera et al., 2009). In order to solve this puzzle, this paper develops a three-sector model to evaluate various factors that could have contributed to the structural transformation process from 1950 to 2005. The results show that, in addition to traditional explanations, such as non-homothetic preference and sector-biased productivity progress, international trade is another major source of structural change and is able to explain about 35.5% of the overall labor share decrease in American manufacturing. The quantitative calibration estimates that the inter-sector trade makes a moderate contribution, while trade imbalances dominate the recent contraction of manufacturing employment share. This paper quantitatively explores the role of trade imbalances in the structural change literature, and it supports the argument that persistent trade deficits have a substantial impact on labor markets.

STRUCTURAL CHANGES OF ECONOMIES: LITHUANIA IN THE GLOBAL CONTEXT

Structural economic change theory focuses on the process through which economic structures have been transformed from traditional agriculture economy to more modern and industrially diverse manufacturing and service ones. The purpose of this paper is to detect the pattern of structural changes of the Lithuanian economy and to evaluate it in the global context. Structural economic statistics of the countries provide a view of a particular year delivered by indicator of the level of output in a considered sector of selected country’s economy. Research methodology is based on the classic three-sector model, which involves structural changes’ assessment methods and comparative analysis of statistical data on economic structures. The main findings reveal peculiarities of the structural change tendencies of the Lithuanian economy in the global context. First of all, the economies of selected countries are being analyzed from the point of view of three-sectoral divisions, such as agriculture, industry and services; the authors highlight the main tendencies of global economy taken by regions. After further in-depth analysis of the Lithuanian economic structural changes’ assessment in the context of the other countries (regions) has been carried out and new evidence on patterns of structural change has been provided, concluding remarks have been formulated. Authors provide insights about peculiarities of Lithuanian economy’s structural changes, which could potentially lead to respective policy implications, ultimately aiming acceleration of economic development.

Labor reallocation in China: 1978–2011

This paper develops a three-sector model to analysis the mechanism of cross sectoral labor reallocation in China over the period of 1978–2011. The model incorporates factors of sectoral differences in productivity, non-homothetic preference characteristics of consumers, and institutional barriers of labor mobility. Moreover, the model considers changes in the scale of the public sector as an important driving force. We find that there are two effects of changes in the scale of the public sector in declining public sector output on labor reallocation. First, enterprises will increase the share of capital input to labor, resulting in relative expansion of non-agricultural production. Second, residents' income will also increase, together with the relative increase in demand towards non-agricultural goods due to non-homothetic preference characteristics of consumers. Therefore the non-agricultural production will further expand.

Skilled–unskilled wage inequality, product variety and unemployment: A static general equilibrium analysis

The paper develops a three-sector small open economy model with two traded final good sectors and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a tradedgood uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. The efficiency wage hypothesis is introduced to explain unemployment in each of these two labour markets. It is shown that an increase in either type of labour endowment (capital endowment) raises (lowers) the unemployment rate of either type of labour if the scale elasticity of output is very low. On the other hand, if the industrial sector is more capital intensive than the agricultural sector and if efficiency functions of both types of labour are identical, then an increase in either type of labour endowment (capital endowment) lowers(raises) the skilled–unskilled wage ratio. However, the effect of a change in capital endowment on the Gini Coefficient of wage income distribution is ambiguous in sign.

Labour Productivity and Energy Use in a Three-Sector Model: An Application to Egypt

This article presents a model of a developing economy with three sectors — industry, agriculture and energy. Industry and energy are assumed to be demand-constrained, but agriculture supply-constrained. The model highlights: (a) structural transformation, through labour transfer from agriculture to industry; (b) inflation, driven by the interaction of demand and the supply constraint in agriculture; and (c) the link between energy use and labour productivity. Employing a Kaldor-Verdoorn productivity rule in industry augmented with energy intensity — energy per unit of labour — as an argument, we emphasize that labour productivity growth is driven by energy intensity rather than energy productivity growth. As a consequence, emissions reduction without North–South technology transfer and financial assistance costs growth.

The VAT and Reproduction Process

The article estimates the negative influence of the VAT on economic development. The functional role of each element of production process is defined. On this base the three-sector model of social reproduction is worked out. The reason for increasing sums of the VAT compensation is considered. The conclusion about the necessity of replacing the VAT with other tax which does not demand compensation is made.

Accumulation of Foreign Exchange Reserves and Long Term Growth

Cross-country regressions, reported in this paper for 1960-99 period, seem to suggest that the accumulation of foreign exchange reserves (FER) contributes to economic growth of a developing economy by increasing both the investment/GDP ratio and capital productivity. We offer the following interpretation of these stylized facts: (1) FER accumulation causes real exchange rate (RER) undervaluation that is expansionary in the short run and may have long term effects, if such devaluations are carried out periodically and unexpectedly; (2) RER undervaluation allows to take full advantages of export externality and triggers export-led growth; (3) FER build up attracts foreign direct investment because it increases the credibility of the government of a recipient country and lowers the dollar price of real assets. A three-sector model of endogenous economic growth (including a consumer good sector, investment good sector and an export trade sector) is suggested to demonstrate how undervaluation may improve social welfare. Concepts of FER accumulation trajectories and equilibrium trajectories are introduced. It is demonstrated that small udervaluation of the equilibrium exchange rate may be wealth improving.