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Distortions, structural transformation and the Europe-US income gap

Author

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  • Bah El-hadj

    (Department of Economics, University of Auckland, Auckland, New Zealand)

Abstract

This paper uses a model of structural transformation with sectoral distortions to study the convergence of income between Western Europe and the United States (US). It shows that in addition to income effects and growth differentials in sectoral total factor productivities (TFP), sectoral distortions are important for understanding the reallocation of resources across sectors. Allowing for a growing wedge between the marginal revenue product of labor relative to capital can explain the rapid decline in the manufacturing share of hours for the US that started in the 1980s. The distortions are also important for explaining the paths of sectoral hours for many European countries. However, the distortions lead to a misallocation of resources across sectors, which helps explain why the rapid Europe-US income convergence that started in the 1950s stopped in the early 1980s.

Suggested Citation

  • Bah El-hadj, 2013. "Distortions, structural transformation and the Europe-US income gap," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 681-714, September.
    • Handle: RePEc:bpj:bejmac:v:13:y:2013:i:1:p:34:n:17
    DOI: 10.1515/bejm-2012-0147
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    References listed on IDEAS

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    More about this item

    Keywords

    European catch-up; policy distortions; sectoral productivity; structural transformation; JEL Classification: E2; O1; O4;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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