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Patterns of Structural Change: A review of labor productivity decomposition

Actualizado: 5 ago 2020

Antonio Martins Neto

Moving away from poverty and set off a path of development remains a challenge in many countries. One of the main obstacles is to shift from traditional and low productivity sectors, such as agriculture, towards higher productivity ones. This process of transformation is called Structural Change and, even though it includes a broad set of interconnections, it is usually defined as the shift from low productivity sectors towards higher productivity sectors. For some Latin American economies, however, this definition can be misleading. The decomposition of labor productivity (see Rodrik and McMillan, 2011 and M.P. Timmer, G.J de Vries and K. de Vries, 2014) as a tool to understand the Structural Change in Latin American countries can give us an erroneous vision of the real process. This methodology decomposes labor productivity growth in two components, within (the growth within each sector, i.e., the growth in labor productivity is a result of increasing productivity in each sector through capital accumulation, technological change, etc.) and Structural Change (the growth is a result of a shift of labor share towards more productive sectors)1. Figure 1 shows the cases of Chile and Venezuela (these countries were chosen because of the importance of the mining sector for their economies and because the results seems to be particularly problematic when using the aforementioned methodology). First, notice that for Chile the period from 1950 to 1975 the Structural Change term appears as negative, even though this period is characterized by reduction in the importance of agriculture. In 1950, the share of agriculture in total employment was of 31%, while in 1975 this share was about 24%. For Venezuela the case is even more impressive. In 1950, the share of agriculture in total employment was 44% and in 1975 was about 16%. However, figure 3 shows a strong negative Structural Change, even though the shares of manufacture, finance and transports have increased. It is obvious that the simple decrease in agriculture’s share does not necessarily imply in a Structural Change, but these results seem peculiar, since there is a clear movement towards sectors with higher productivity. Additionally, for both countries there is positive Structural Change between 1990 and 2011, even though this is a period in which the structure kept unchanged. 1) Used the updated and extended Groningen Growth and Development Centre (GGDC) 10-Sector database, which includes annual time series of value added and persons employed for ten broad sectors of the economy from 1950 to 2011. 

Figure 1. Decomposition results for 1963-1975, 1975-1990, 1990-2005 and 1990-2010 for Chile and Venezuela

Source: Authors’ calculations using the GGDC Sector database.

These results are strongly related with the mining sector in these economies. The large gap in terms of labor productivity between mining and other sectors distorts the results. Besides that, periods such as the boom of commodities prices give the wrong idea of Structural Change. The simplest way to revert this problem is to remove the mining sector from the database and recalculate the decomposition. The new results are presented in Figure 2, in which we can notice a remarkable difference for the first period and, as well, the period between 2000 and 2011, compared to the results presented in the previous section. For the first period (1950-1975), both countries have now a positive Structural Change and, for the case of Venezuela, a significant one.

Figure 2. Decomposition results for 1963-1975, 1975-1990, 1990-2005 and 1990-2010 for Chile and Venezuela without the mining sector.

Source: Authors’ calculations using the GGDC Sector database.

Equally important is that, for the period 2000-2011, the Structural Change term changes sign, which indicates that the previous positive sign was a result of an increasing share of the mining sector in total employment. It is undeniable that a shift towards the mining sectors in the Latin American economies is an indication of an increasing dependence in commodities exports, a consequence of the commodity prices boom in this decade. In resume, the use of this methodology can give us misleading results. Transform the production structure, i.e., generate more productive and better jobs, is not necessarily a shift between sectors with different productivities. In order to alter the course of an economy, the Structural Change must be towards sectors more dynamic in terms of technological progress and external dynamics (the latter understood as a higher elasticity of exports). Diversify the exports structure is an essential part of this transformation, as well as reduce the technological gap. References:

  • Rodrik, D., & McMillan, M. (2011). Globalization, structural change, and productivity growth

  • (NBER working paper 17143). Cambridge: NBER.

  • M.P. Timmer, G.J de Vries, & K. de Vries (2014). Patterns of Structural Change in Developing Countries. GGDC research memorandum 149

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