DP9386 Sectoral Technology and Structural Transformation

Author(s): Berthold Herrendorf, Christopher Herrington, Akos Valentinyi
Publication Date: March 2013
Keyword(s): CES production function, Cobb-Douglas production function, elasticity of substitution, structural transformation
JEL(s): O11, O14
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9386

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.