Complementarity and Transition to Modern Economic Growth

In developing countries, aggregate labor productivity typically remains stagnant for long periods before taking-o¤. We study this as the outcome of a gradual transition of the workforce from traditional to modern sectors. While exogenous productivity growth is present in the modern sector only, transition to the modern sector is gradual because work experience is sector-speci…c and complements labor. This generates an S-shaped income growth for the dual economy, the e¤ect of which enters into TFP in an aggregate production function. We measure the theory using nationally representative micro data from Thailand (1976-1996). The technology parameters are estimated using a cross-sectional earnings equation implied by the model. We …nd the model simulated at these estimates captures well the nonlinear dynamics of aggregate earnings growth and inequality in Thailand. JEL: O11, O47, J31 Keywords: Complementarity, Modern Economic Growth, Transition Dynamics, TFP, Inequality Department of Economics, University of Southern California. We appreciate the helpful comments from the participants of seminars and conferences at Yale, UCLA, UCR, Society for Economic Dynamics Annual Meeting 2005, Conference on Microeconomics of Growth 2005 in Beijing (International Conference on Economic Development: China and the World), Paci…c Conference for Development Economics 2006, and North American Summer Meeting of the Econometric Society 2006. We are grateful for data obtained from the Thai National Statistical O¢ ce under collaboration with the Townsend Thai Project at the University of Chicago. Corresponding Email: [email protected]