Agricultural composition and labor productivity

Abstract

Labor productivity differences between developing and developed countries are much larger in agriculture than in non-agriculture. We show that cross-country differences in agricultural composition explain a substantial part of labor productivity differences. To this end, we group agricultural products into two sectors that are differentiated only by capital intensity. As the economy develops and capital accumulates, the price of labor- intensive agricultural goods relative to capital-intensive agricultural goods increases. This price change drives a process of structural change that shifts land and farmers to the capital-intensive sector, increasing labor productivity in agriculture. We illustrate this mechanism using a multisector growth model that generates transitional dynamics consistent with patterns of structural change observed in Brazil and other developing countries, and with cross-country differences in agricultural composition and labor productivity. Finally, we show that taxes and regulations that create a misallocation of inputs within agriculture also reduce the relative labor productivity.