Dual economy models: a primer for growth economists

Temple, Jonathan R. W. (2005). Dual economy models: a primer for growth economists. The Manchester School, 73(4), 435-478.

This paper argues that dual economy models deserve a central place in the analysis of growth in developing countries. The paper shows how these models can be used to analyse the output losses associated with factor misallocation, aggregate growth in the presence of factor market distortions, international differences in sectoral productivity and the potential role of increasing returns to scale. Above all, small-scale general equilibrium models can be used to investigate the interactions between growth and labour markets, to shed new light on the origins of pro-poor and labour-intensive growth, and to explore the role of the informal sector.

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Alternatively, please email me and I can send you a PDF.

Dualism and aggregate productivity

A revised version (August 2003) of University of Bristol discussion paper no. 02/532. This paper was formerly called “The costs of dualism”.

This paper shows how to calibrate a two-sector general equilibrium model of production using a small number of parameter assumptions and readily available data. The framework is then used to analyze the costs of labor market dualism. The paper quantifies the effects of rural-urban wage differentials and urban unemployment on aggregate productivity, wages and returns to capital, factor shares, and sectoral structure. One of the main findings is that labor market rigidities can have a major impact on the extent of industrialization.

Download the August 2003 version: dualcost0803.pdf

Dualism and cross-country growth regressions

with Ludger Wößmann

Temple, Jonathan R. W. and Wößmann, Ludger (2006). Dualism and cross-country growth regressions. Journal of Economic Growth, September 2006, 11(3), 187-228.

This paper develops empirical growth models suitable for dual economies, and studies the relationship between structural change and economic growth. Changes in the structure of employment will raise aggregate productivity when the marginal product of labour varies across sectors. The models in the paper incorporate this effect in a more flexible way than previous work. Estimates of the models imply sizeable marginal product differentials, and indicate that the reallocation of labour makes a significant contribution to the international variation in productivity growth.

The published version is a revision of CEPR discussion paper 5655 and, in particular, now uses WDI labour force data in preference to the PWT 6.1 labour force data, for reasons discussed in the new version. The changes in results compared to the CEPR discussion paper version are usually minor.

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Growth and wage inequality in a dual economy

Temple, Jonathan (2005). Growth and wage inequality in a dual economy. Bulletin of Economic Research, April, 57(2), 145-169.

Who benefits from economic growth? This paper analyses the distributional impact of different types of growth within a two-sector model. The paper first presents necessary and sufficient conditions for unambiguous changes in wage inequality in a dual economy, based on analysis of the entire Lorenz curve. These conditions are then applied to the Harris-Todaro model with an urban non-agricultural sector and rural agriculture. It is shown that capital accumulation or technical progress in agriculture can shift the Lorenz curve inwards and reduce wage inequality, while the effects of development in non agriculture are typically ambiguous.

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A PDF of the published version can be supplied on request; please email me at jon.temple@bristol.ac.uk. Alternatively, you can download the prepublication version: templeberfinalversion.pdf

Human capital, equipment investment, and industrialization

with Hans-Joachim Voth

Temple, Jonathan and Voth, Hans-Joachim (1998). Human capital, equipment investment, and industrialization. European Economic Review, 42(7), July, 1343-1362.

This paper constructs simple models in which industrialization is driven by human capital accumulation. Industrialization can explain the robust correlation between equipment investment and growth in developing countries. We show that government intervention is justified within our stylized model, and indicate that a subsidy to equipment investment is likely to be dominated by other policies. In the final section of the paper, we examine the correlation between equipment investment and growth, and find that it is strongest in economies on the brink of industrialization. We also show that this result is not easily explained by diminishing returns.

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To download the data set and documentation, hold down the left shift key and click on the links below, or alternatively press the right mouse button and choose ‘save link as’.

indequip.txt Documentation
indequip.csv Data set (comma-separated-value format)

Labor markets and productivity in developing countries

with Mathan Satchi

Satchi, Mathan and Temple, Jonathan R. W. (2009). Labor markets and productivity in developing countries. Review of Economic Dynamics, January, 12(1), 183-204.

In middle-income countries, the informal sector often accounts for a substantial fraction of the urban labor force. We develop a general equilibrium model with matching frictions in the urban labor market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labor market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico.

Download the published version from ScienceDirect
An older version circulated under the title “Growth and Labour Markets in Developing Countries”, available as a Bristol working paper dp06581.pdf. The older version includes two theories of urban wage determination, rather than just one.

Life during structural transformation

with Huikang Ying

Temple, Jonathan R. W. and Ying, Huikang (2014). Life during structural transformation. University of Bristol discussion paper 14/650. To be revised, spring 2015.

We examine whether structural transformation leads to a Kuznets curve. We present a dynamic general equilibrium model with heterogeneous workers, occupational self-selection and selective migration, and calibrate the model to survey data for Malawi. We show that structural transformation raises living standards unevenly. As development proceeds, the movement of workers from agriculture is associated with rising wage inequality, rather than a Kuznets curve. The increase in sectoral wage inequality is pronounced for agriculture. At the same time, structural transformation is associated with major reductions in rural poverty, and eventually in urban poverty.

Download University of Bristol discussion paper via the IDEAS database.

Rich nations, poor nations: how much can multiple equilibria explain?

with Bryan S. Graham

Graham, Bryan S. and Temple, Jonathan R. W. (2006). Rich nations, poor nations: how much can multiple equilibria explain? Journal of Economic Growth, 11(1), March, 5-41.

This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two-sector general equilibrium model that gives rise to multiplicity, and calibrate the model for 127 countries. Under the assumptions of the model, around a quarter of the world’s economies are found to be in a low output equilibrium. We also find that, since the output gains associated with an equilibrium switch are sizeable, the model can explain between 15 and 25 percent of the variation in the logarithm of GDP per worker across countries.

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For the data and Mathematica code we used in calibrating the model, please see the website of my co-author, Bryan Graham. Many of the derivations used for the paper can be found in this unpublished appendix.

Structural change and Europe’s Golden Age

University of Bristol Discussion Paper no. 01/519.

Most of the countries of Western Europe grew at unprecedented rates from the late 1940s until the early 1970s. Another feature of this period was dramatic structural change, as employment shifted from agriculture to manufacturing and services. This paper uses growth accounting to measure the direct contribution of structural change to aggregate productivity growth. The conventional accounting framework is extended and then applied to Western Europe and the USA for the period 1950-1990. The paper quantifies the importance of structural change in explaining the Golden Age, the productivity slowdown, and the cross-country variation in post-war growth rates.

Download the paper: realloc21.pdf

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