Abstract:
This paper proposes a theory of structural change that is consistent with the long-run data. We first document the reallocation of final consumption expenditures
across the three broad sectors agriculture, manufacturing, and services in the United States, the United Kingdom, Canada and Australia. We find three robust features of the sectoral consumption expenditure shares since the beginning of the last century: (i) a monotonic decrease in agriculture, (ii) a hump shape in manufacturing, and (iii) an accelerated rise of services. Given historical panel data on sectoral prices and nominal per-capita expenditure from 1900 to 2014, we then ask what demand side theory can quantitatively explain the observed structural change. Our analysis shows that the preference specification commonly used in the structural change literature - the generalized Stone-Geary specification - struggles to do so. We propose a generalization of the Price Independent Generalized Linearity (PIGL) class of preferences which is flexible enough to allow for a non-monotonic relationship between sectoral expenditure shares and can therefore fit the historical data much better. Under some restrictions, it can also be consistently used in a dynamic general equilibrium model with steady growth.