Structural Change and the Kaldor Facts of Economic Growth

Abstract

The model presented in this paper reconciles two of the most important features of the long-run growth process: the massive changes in the structure of production and employment; and the Kaldor facts of economic growth. Structural change occurs because Engel-curves are non-linear. Each new good goes through Engel's consumption cycle, i.e. starts out as a luxury with a high income elasticity and ends up as a necessity with a low income elasticity. The coexistence of stagnating and expanding industries imply a changing sectoral composition and a continuous reallocation of labor across sectors. Nonetheless macroeconomic aggregates grow at a constant rate, and the real interest rate and the labor share are constant. Our model also addresses the two-way causality between economic growth and structural change. Complementarities between aggregate and sectoral growth may give rise to multiple equilibria providing a possible explanation for development failuresKaldor facts, Engel-curve, structural change, structural transformation, hierarchic preferences