Structural Transformation under Trade Imbalances: the Case of Postwar U.S.

A striking feature of the structural change literature is that, even though the U.S. economy is often used as a benchmark for calibration, the traditional model cannot account for the steep decline in manufacturing and rise in services in the United States since early 1980s (Buera and Kaboski, 2009). In order to solve the puzzle, this paper develops a three-sector model to evaluate various factors that could contribute to the structural transformation process from 1950 to 2005. The results show that, in addition to the traditional explanations, such as the non-homothetic preferences and sector-biased productivity progress, trade imbalance is another major source of structural change, which is able to explain about 38 percent of the overall labor share decrease in the American manufacturing. The quantitative predictions replicate the labor movements in the U.S. data, especially can properly explain the recent contraction of manufacturing employment share. This result is robust to different parameter values and alternative labor share measure. This paper is so far the first work that considers the intra-industry trade in the structural change literature which might support the argument that trade imbalances have substantial impact on the labor markets.