Structural Change and Jobless Development

Benchmark models of structural transformation focus on the reallocation of employment across sectors while assuming that overall employment stays constant. We show that this assumption does not match facts for developing economies. We study a panel of 48 mostly developing economies over the period 1990--2018 and document a strong positive relationship between the share of the population employed in agriculture and the overall employment rate. That is, the early part of the development process is associated with a substantial decline in the total employment rate. Motivated by this finding, we extend a benchmark model of structural change featuring Stone-Geary preferences to allow for endogenous labor supply. We show that this model can account for the patterns we document in the data both qualitatively and quantitatively. We use a calibrated version of our model to study the employment dynamics in several developing economies and show that structural change is a quantitatively important source of employment changes during the early stages of development.