Growth and Structural Change in a Dynamic Lagakos-Waugh Model

This paper proposes a dual growth model built on a mechanism of self-selection whereby heterogeneous workers choose their optimal sectors based on comparative advantage. It shows that economic growth shifts workers’ comparative advantage, and this shift induces rural-urban structural change. Following this mechanism, the model shows that average individual productivity in agriculture increases, while that in the non-agriculture sector decreases during structural change. Findings from simulations suggests an inverse correlation between the speed of structural change and dispersion of productivity across workers, and present improved predictions on transitional dynamics compared to the standard neoclassical growth model. The analysis of wage dynamics suggests that inequality over time does not necessarily follow an inverted-U curve when structural transformation takes place.