Structural Change at a Disaggregated Level: Sectoral Heterogeneity Matters

I analyze a disaggregated structural change model for the US economy in the post-Second World War period. My results reveal that the positive correlation between the relative price and the relative quantity of services with respect to goods, a fact that challenges CES preferences commonly used in the structural change literature, largely reflects the heterogeneous makeup of the services sector. I show that a preference specification where service industries with high productivity growth (progressive services) are separated from the rest of services can account for this positive correlation without any income effects. Consistent with the development facts, the disaggregated structural change model I consider implicates a hump for the relative price of investment. Regarding structural change in investment, the results of the disaggregated model differ from the existing literature. More specifically, the price of services relative to goods declines over time and the rise of the services sector in investment reflects the substitutability between goods and services.