Working Paper: CEPR ID: DP9386
Authors: Berthold Herrendorf; Christopher Herrington; Akos Valentinyi
Abstract: This paper assesses how structural transformation is affected by sectoral differences in labor-augmenting technological progress, capital intensity, and substitutability between capital and labor. We estimate CES production functions for agriculture, manufacturing, and services on postwar US data and compare them with Cobb--Douglas production functions with different and with equal capital shares. We find that sectoral differences in labor-augmenting technological progress are the dominant force behind changes in sectoral labor and in relative prices. As a result, Cobb--Douglas production functions with equal capital shares (which by construction abstract from differences in capital intensity and the elasticity of substitution) capture the main economic forces on the technology side behind postwar US structural transformation.
Keywords: CES production function; Cobb-Douglas production function; elasticity of substitution; structural transformation
JEL Codes: O11; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor-augmenting technological progress (O49) | Sectoral labor allocation (J29) |
| Labor-augmenting technological progress (O49) | Relative prices of outputs (P22) |
| Agriculture is most capital-intensive (Q14) | Relative prices of outputs (P22) |
| Capital and labor are most easily substitutable in agriculture (J43) | Mechanization wave in US agriculture (N52) |
| Uneven labor-augmenting technological progress (J49) | Trends in sectoral labor (J21) |
| Uneven labor-augmenting technological progress (J49) | Trends in relative prices (E30) |