The Impact of Intersectoral Labour Reallocation on Economic Growth

This paper explains economic growth differences in an aggregate production function framework, where labor reallocation from agriculture to modern sectors influences labor efficiency growth. The econometric analysis uses a panel of 65 developing and industrial countries over 1960-90. The results highlight: (i) differences in the impact of labor reallocation on growth, resulting from variations in the intersectoral wedge in labor productivities; (ii) the significance of labor reallocation effects, even after controlling for capital accumulation, initial conditions and country effects, and adjusting for endogeneity; (iii) their role in explaining slow productivity growth in Africa; and (iv) the role of initial conditions and capital accumulation in explaining differences in labor reallocation rates.