What the ongoing movement of workers out of agriculture means for economic policy

By Taylor Jaworski, Queen’s University

Structural transformation is the long-run process that moves workers (and the output they produce) from agriculture to the manufacturing or service sectors. Empirically, this process is characterized by a declining share of employment (and output) in agriculture as income per capita rises. The flip side of the transition out of agriculture is the increasing then decreasing importance of manufacturing and the increasing importance of services. The figure below, which is taken from a recent survey by Berthold Herrendorf, Richard Rogerson, and Akos Valentinyi, illustrates this pattern for several currently developed countries since 1800.


Structural Transformation in Developed Countries Since 1800

Structural transformation poses several challenges for policymakers. To see why, a useful starting point is the large literature in economics that describes the mechanisms underlying the transition out of agriculture. In general, these mechanisms fall into two categories. On the demand-side, a version of what is called Engel’s law says that rising incomes cause employment in agriculture to decline because agricultural goods make up a smaller share of expenditures. On the supply-side, more rapid productivity growth in agriculture together with complementarities between farm and non-farm goods in consumption leads workers to switch from the agriculture to manufacturing or services.

Historically, both forces tend to be relevant in understanding a particular society’s trajectory toward modern economic growth. The Industrial Revolution in Britain after 1750 is associated by many with changes in technology that increased the productivity of agriculture, decreased the costs of transporting goods to distance markets, and increased the demand for labor outside of agriculture. In a recent paper, Francisco Alvarez-Cuarado and Markus Poschke develop a methodology for quantifying the relative importance of “push” versus “pull” factors moving workers between agriculture and manufacturing (and services).

Less well known among non-economic historians is the revolution in demand for new goods and leisure that began prior to 1750: the so-called Industrious Revolution. For a detailed review of these demand-side changes see Jan de Vries’ The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present. Importantly, both of these “revolutions” played a role in structural transformation and setting Britain and other countries on the path to modern economic growth.

In an ongoing project with my Queen’s colleague, Ian Keay, I am collecting new data on the distribution of manufacturing activity by industry and district since 1850 to better understand structural transformation in the Canadian context. In general, we are interested in the regional variation that accompanies the process of structural transformation. Specifically, we aim to quantify the benefits (and costs) for different regions associated with Canada’s transition out of agriculture, which was associated with technological change in many sectors, globalization of the Atlantic economy and beyond, and the migration of manufacturing activity within Canada from the Maritime provinces to locations between Montreal and Toronto. The changes that followed structural transformation in Canadian economic history and elsewhere highlight a lesson for policymakers: the aggregate gains from economic growth may not be shared equally among regions within a country.

A related lesson can also be framed in terms of the impact of economic growth and structural transformation on workers throughout the distribution of income, wealth, skills, etc. Economists are increasingly drawing attention to the effects of computerization, the automation of tasks, and technological progress more generally that is altering the structure of employment. In particular, David Autor, Frank Levy, and Richard Murnane for the United States, David Green and Ben Sand for Canada, and Alan Manning and Maarten Goos for Britain document the extent of “job polarization” over the last several decades. Focusing on the years just before and after the Great Recession, a recent paper by Matthew Notowidigdo, Kerwin Charles, and Erik Hurst examines the hypothesis that a boom the in the construction sector in the United States masked an economy more rapidly shedding jobs in manufacturing—a sector in cultural, political, and economic terms associated with the middle class.

What has emerged from this more recent structural transformation and the accompanying trend toward polarization is a particular pattern of time-use with respect to work and leisure. Focusing on men in their 20s in the United States, Mark Aguir, Mark Bills, Kerwin Charles, and Erik Hurst (summarized herehere, and here) document a greater willingness to forego independence and work in favor of living at home and playing video games. The details of the results are striking: among this group of unemployed young men the average number of hours spent playing video games was 8.6 from 2011 to 2014, more than double the average of 3.4 hours from 2004 to 2007.

As evidence that this at least partially reflects the choices of these young men—and not only the absence of job opportunities—they also report being happier. In turn, these potential workers are not acquiring experience that will contribute to wage growth when (or if) they do enter the labor force later in life. This pattern, if it is borne out by more research and extends to other countries, highlights another lesson for policymakers: structural transformation and the short-run benefits associated with technological progress will not be shared equally across workers with different skills or from different socioeconomic backgrounds.