Abstract:

We study a multi-sector model of growth with differences in TFP growth rates across sectors and derive sufficient conditions for the coexistence of a balanced aggregate growth path, with all aggregates growing at the same rate, and structural change, characterized by sectoral labor reallocation. The conditions needed are weak restrictions on the utility and production functions: goods should be poor substitutes and the intertemporal elasticity of substitution should be one. We present evidence from US and UK sectors, that is consistent with our conclusions and successfully calibrate the shift from agriculture to manufacturing and services in the United States.