Along the path of development, the number of major sectors follows an inverse U-shaped curve. Specifically, we argue that when sectors are set to increasing marginal costs, the number of sectors follows an inverse U-shaped curve. As long as this marginal cost is less than one, development increases the number entire sectors in the economy.
When marginal cost is higher than one, development reduces the number of sectors in the economy. It can therefore be shown that the total number of sectors follows an inverted U-shaped curve. We contend that the reason the number of sectors is increasing and then decreasing during the development process is a very basic assumption in economics, namely rising marginal costs.
As the economy grows and E moves along the SPPF to the right, that is, as modern sectors replace traditional sectors, the number of sectors increases. Therefore, the number of sectors follows an inverted U-shape, as found empirically by Imbs and Wacziarg (2003). Note that the point of maximum number of sectors E∗ is the point where the marginal cost of establishing a new modern sector in terms of traditional sectors is exactly equal to 1.
Therefore, if the marginal cost of establishing a modern sector increases, the number of sectors in the economy increases, reaches a maximum and then decreases during the process of economic development.
Production of the Final Good
Production of the Intermediate Goods
Traditional Sectors
Modern Sectors
Factor Prices
The Final Good
The Traditional Good
The more traditional sectors emerge, the lower the rents of each of them, since each sector occupies a smaller share of the market and thus employs fewer workers.
The Modern Good
Equilibrium
Individuals
Labor Market Clearing
Goods Markets Clearing
Solution
4 Cross Country Analysis
Productivity
- Stages of Diversification
Proposition 2 describes the condition under which development, or replacement of traditional by modern sectors, is driven by an increase in productivity A, the productivity of the modern sectors. Theorem 2 An increase in productivity increases the number of modern sectors at the expense of traditional sectors along the concave boundary described in (22) if and only if ρ∈(0,1). Theorem 2 states that ifρ ∈ (0,1), then the number of modern sectors grows asAgain at the expense of the traditional ones.
However, this result does not guarantee that the total number of sectors shows an inverted U-shaped pattern with respect to development, which we capture by the parameter A. As depicted in Figure 1, even with a concave production boundary as long as the slope is less than −1, the transition from traditional to modern sectors increases the total number of sectors and vice versa. So to ensure the inverted U-shaped pattern of the total number of sectors, a slope of −1 must lie at an inner point on the boundary and this is what we investigate next.
The maximum number of sectors is thus located at the point where the slope of the production frontier, described by (22), is (−1). Note that equation (28) shows that A∗ is a finite number, which implies that for a sufficiently large area of productivity the cross-sectional relationship between productivity and the number of sectors exhibits an inverted U-shape. From (6) and (23), the prices of the traditional and modern intermediate goods at this time could be written as.
Differences in Education Cost
5 Effects on the Distribution of Wages
Skill Premium
Gender Differences
- Within versus between Gender Inequality
We assume that raw labor is associated with physically intensive tasks and efficiency units of labor are associated with metal intensive tasks. Furthermore, it is believed that men are stronger than women, but they are equal in terms of mental aptitude. So while each man is endowed with one unit of raw labor and a few efficiency units of labor, each woman is endowed with γ < 1 units of raw labor and a few efficiency units of labor.
Men and women are equally distributed in terms of labor efficiency units on the segment[0,¯h]. Pitt, Rosenzweig, and Hassan (2011) present evidence on the distribution of grip strength among adult men and women in the United States. Their appendix Figure 1 shows that men in both populations are significantly stronger than women and that the distribution by gender is the same in both countries.
They found that in urban Brazil, body mass contributed to men's earnings, but not to women's. As a result of development, captured in our model by an increase in productivity, A, the economy moves from traditional sectors to modern ones and, therefore, both hma0 and hf e0 decline, affecting within-gender as well as between-gender inequalities. . In the modern sectors, however, the ratio of the average income between the two sexes, indicated by Ris.
First, with respect to gender inequality, our model assumes that the variation across individuals in units of efficiency is greater than that of raw labor. As a result, a migration from the traditional sectors to the modern ones increases within gender inequality. Second, regarding gender inequality, our model abstracts from the unemployment issue, so that all men and women are fully employed by assumption.
Since women have a relative advantage in producing the modern good, as they are endowed with fewer units of raw labor, γ < 1, the ratio of women to men in the modern sector is more than one. For example, the average woman has less efficient work units than the average man and there is a pay gap between men and women. As productivity increases, constant productivity in traditional sectors means that more men enter modern sectors than women, narrowing the gap in average skills between the sexes, as well as the wage gap.6.
6 Concluding Remarks
The paper distinguishes between modern and traditional sectors and is based on a very standard assumption in economics, which is the assumption of increasing marginal costs. Assuming that individuals are equally endowed with raw labor power, while efficiently dividing labor among them, raises the marginal cost of creating new sectors. Since throughout the development process, economies move from traditional to modern sectors, and since individuals with more efficient units are employed first, the marginal reduction in traditional sectors increases with the number of modern sectors.
Robinson, "The Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," Quarterly Journal of Economics, November. Dornbusch, Rudiger, Stanely Fischer, and Paul Samuelson, "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, December. Gosling, Amanda, "The Changing Distribution of Men's and Women's Wage Can the Simple Skills Story Be Rejected?", September 2003.
Matsuyama, Kiminori, "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade,"Journal of Economic Literature, december.
