ECON7570Contemporary Issues in Economic Development
Lecture 10
Satoshi Tanaka
University of Queensland
May 13, 2015
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development Lecture 10
ECON7570 Contemporary Issues in Economic Development
Structural Transformation and Economic Growth II
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 2 of 42
Structural Transformation and Economic Growth
Consequence of the Rise of the Service Sector
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 3 of 42
Sectoral Share in Value Added (GDP), U.S.
Figure : Sectoral Shares in Value Added (GDP) for Selected DevelopedCountries, 1800 - 2000: Belgium, Spain, Finland, France, Japan, Korea,Netherlands, Sweden, UK, US
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 4 of 42
Agricultural Share in Value Added (GDP), Cross Countries
Figure : Sectoral Shares in Value Added (GDP) for Selected DevelopedCountries, 1800 - 2000: Belgium, Spain, Finland, France, Japan, Korea,Netherlands, Sweden, UK, US
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 5 of 42
Manufacturing Share in Value Added (GDP), CrossCountries
Figure : Sectoral Shares in Value Added (GDP) for Selected DevelopedCountries, 1800 - 2000: Belgium, Spain, Finland, France, Japan, Korea,Netherlands, Sweden, UK, US
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 6 of 42
Service Share in Value Added (GDP), Cross Countries
Figure : Sectoral Shares in Value Added (GDP) for Selected DevelopedCountries, 1800 - 2000: Belgium, Spain, Finland, France, Japan, Korea,Netherlands, Sweden, UK, US
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 7 of 42
Recap: What Explains the Rise of the Service Sector?
Demand-side story
Extended Engel’s law (Kongsamut, Rebelo, and Xie (2001)):
1 Households like to spend a smaller fraction of their budget on foodas they become richer (Engel’s law)
2 More generally, the share of necessities falls and the share of luxuriesrises as individuals get richer
3 As a result, the share of agriculture falls, replaced by manufacturing(the luxury items at the time)
4 Then the share of manufacturing falls while services (that containmore luxuries) rises
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 8 of 42
Recap: What Explains the Rise of Service Sector?
Production-side story
Differential TFP Growth Across Sectors (Ngai and Pissarides (2005))
1 Productivity growth has been very fast in agriculture, which hasmade it unnecessary to employ as many workers as before
2 Similarly, manufacturing today is so productive that you need to hirefar fewer people to produce the same amount
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 9 of 42
Today’s Plan
Today, we are gonna investigate three outcomes of structural changein details
1 Female labor force participation and gender wage gap
2 The difference in hours worked between the U.S. and the Europe
3 Wage inequality
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 10 of 42
Structural Transformation and Economic Growth
Narrowing Gender Gap in Labor Markets
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 11 of 42
Female Labor Force Participation (FLFP) Rate, U.S.The timing of the rise of FLFP roughly coincides with the timing ofthe rise of services
Figure : Female Labor Force Participation Rate, U.S., 1947 - 2013Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 12 of 42
Hourly Gender Wage Gap, U.S.
Figure : Hourly Gender Wage Gap (Male/Female), U.S., 1950 - 2005
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 13 of 42
Empirical Evidence
Olivetti and Petrongolo (2013)
The service sector share explains the half of the cross-countrydifferences in FLFP
Ngai and Petrongolo (2013)
The service sector share explains the large portion of the difference infemale’s hours worked and the gender wage gap across states in theU.S.
Regression framework for individuals’ data:
yi,t,s =β0 + β1 × female_dummy + β2 × service_sharet,s
+ β3 × service_sharet,s × female_dummy + ...
where yi,t,s is the variable of interest, i : individual, t: year, s: state.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 14 of 42
Empirical EvidenceThe timing of the rise of FLFP roughly coincides with the timing ofthe rise of services
Figure : The Effect of Service Share on Hours and Wages, U.S., 1977-2009
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 15 of 42
Further Empirical Evidence
Ngai and Petrongolo’s result clearly indicates that:
In a state where the service share is larger, females work longer hoursand have higher wages
There is more direct evidence:
Brain (skill requirement) v.s. Brawn (physical requirement)(originally from Galor and Weil (1996))
In the recent years, there are more brain jobs available for women dueto the rise of services (Bacolod and Blum (2010), Rendall (2010))
Bacolod and Blum (2010) and Rendall (2010) used the Dictionary ofOccupational Titles to show the rise of brain-intensive occupations
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 16 of 42
1950 Occupations in the U.S. (Rendall, 2010)
Figure : 1950 U.S. Census Data for Share of Worker’s Occupation
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 17 of 42
2005 Occupations in the U.S. (Rendall, 2010)
Figure : 2005 U.S. Census Data for Share of Worker’s Occupation
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 18 of 42
Rendall’s (2010) Economic Model
Same number of men and women in the economy
Individuals are characterized by (bi , ri ):
1 bi is the amount of ability for individual i
bi is distributed according to a uniform distribution,b ∼ F = U[bl , bh]
2 ri is the amount of physical strength for individual i
ri = r f if i-person is female, ri = rm if i-person is male
r f and rm are some fixed numbers, and r f < rm
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 19 of 42
Rendall’s (2010) Economic Model
Wages are paid according to the amount of (bi , ri ):
wi = wb,t × bi + wr ,t × ri
A worker participates in the labor market if the wage for him/her ishigher than the value of staying at home, H:
wi = wb,tbi + wr ,tri > H
Assume wb,tbl + wr ,trm > H and wb,tbl + wr ,tr f < H so that allmen participate in the labor market, but some of women stay athome initially
Especially, the threshold value of the amount of brain for woman’sparticipation decision is
b̂ft =
H − wr ,tr f
wb,t
Note that b̂ft is an decreasing function in wb,t
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 20 of 42
Rendall’s (2010) Economic Model
Female labor force participation is defined as:
LFP ft =
∫ bh
b̂ft
dF (b) =bh − b̂f
tbh − bl
As wb,t increases, b̂ft decreases, and then LFP f
t increases
Average female wage is
w̄ ft =
∫ bhb̂f
t
[wb,tb + wr ,tr f ] dF (b)
LFP ft
= 0.5 ×(wb,tbh + wr ,tr f + H
)assuming bh − bl = 1
Similarly, men’s average wage is
w̄mt = 0.5 × (wb,t (bh + bl ) + wr ,trm)
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 21 of 42
Analysis
1 As wb,t increases, b̂ft decreases, and then LFP f
t increases
2 As wb,t increases, women’s average wages increases by 0.5 × bh,while men’s wage increase by 0.5 × (bh + bl )
Note that men’s wages increase more than women’s wages
The gender wage gap doesn’t narrow!?
This is because, as wb,t increases, lower ability women enter labormarkets
The model can explain the increase LFP, but cannot explain thenarrowing gender wage gap in the data
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 22 of 42
Combining Human Capital
In order to overcome this negative selection effect, Rendall (2010)consider education
wi = wb,t × bi×e + wr ,t × ri
where e > 1
Rendall (2010) shows that if we take into account education, thegender wage gap could narrow
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 23 of 42
College Attainment Rate by Gender, 1950 - 2005, U.S.
Figure : College Attainment Rate by Gender, 1950 - 2005, U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 24 of 42
Gender Wage Gap, Model v.s. Data, 1950 - 2005, U.S.
Figure : Gender Wage Gap, Model v.s. Data, 1950 - 2005, U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 25 of 42
Female LFPR, Model v.s. Data, 1950 - 2005, U.S.
Figure : Female LFPR, Model v.s. Data, 1950 - 2005, U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 26 of 42
Gender Gap without Education, 1950 - 2005, U.S.
Figure : Female LFPR, Model v.s. Data, 1950 - 2005, U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 27 of 42
Summary for Brain v.s. Brawn
There are a couple of empirical evidence which shows the nature ofjobs is changing due to structural change
Rendall (2010) shows that:
Brain-Biased Technological Change (BBTC) can increase female LFP
With education, the model can also generate the narrowing genderwage gap
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 28 of 42
Structural Transformation and Economic Growth
Hours Worked in the U.S. and Europe
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 29 of 42
Declining Working Hours in EuropeIn Europe, the average hours worked has significantly declined overtime
Figure : Hours Worked in the U.S. and Europe, 1955 - 2005
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 30 of 42
Rogerson (2008)
Rogerson (2008) explaines it by the difference in tax rate betweenthe U.S. and Europe, and structural changes
In Europe, the labor income tax is higher by about 15-20%, and theservice sector is much smaller
His story:
1 In Europe, because labor income tax rate is high, workers spend lesshours in labor markets
2 Instead, they do home production (cooking, cleaning etc.) more thanworkers in the U.S.
This idea is also supported by evidence that service sector in Europeis much smaller than the one in the U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 31 of 42
Sectoral Shares in the U.S.In Europe, the average hours worked has significantly declined overtime
Figure : Hours Worked in the U.S. and Europe, 1955 - 2005
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 32 of 42
Sectoral Shares in Europe
Figure : Hours Worked in the U.S. and Europe, 1955 - 2005
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 33 of 42
Summary for Hours Worked in the U.S. and Europe
Rogerson (2008) argues that the difference in hours worked can beexplained by the difference in tax rate and structural change
Important things are:
Home production and services are substitute
When labor income tax is high, people work less in the labormarkets, instead do home production activities
As a result, the service sector in Europe get smaller than the one inthe U.S.
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 34 of 42
Structural Transformation and Economic Growth
Structural Changes and Inequality
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 35 of 42
Rise of High Skill Service
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 36 of 42
Share of Compensation in High-Skilled Service
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 37 of 42
Share of Compensation in High-Skilled Service
Buera and Kaboski (2012)
As the income level in the economy increases, people start demandinga more complicated service (medical service, legal service etc.)
To produce such a complicated service, workers need skills (lawyer,doctor)
Therefore, people’s demand in skill-intensive service promotes theinequality in the society
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 38 of 42
Skill Premium and Fraction of College-Educated Worker
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 39 of 42
Co-movement of Service Price and Skill Premium
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 40 of 42
Summary for Structural Changes and Inequality
Buera and Kaboski (2012)
The difference in pay between college and non-college workers has astrong correlation with the relative price of services
As the society get more developed, people’s demand for high-skilledservice creates more inequality
This trend is world-wide, not just in the U.S.!
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 41 of 42
Summary
Today, we studied three outcomes of structural change in details
1 Female labor force participation and gender wage gap
2 The difference in hours worked between the U.S. and the Europe
3 Wage inequality
Evidence support for the idea that structural changes affect a lot onpeople economic activities
Remember that these changes are still on going, not the ones in thepast
Satoshi Tanaka ECON7570 Contemporary Issues in Economic Development 42 of 42