International Monetary Fund. External Relations Dept.
IMF S urvey: How has the Canadian economy fared relative to that of the United States in recent years? Why the special interest in the laborproductivitygap?
Cardarelli: In recent years, Canada’s growth has exceeded that of most other industrial countries—including the United States—by substantial margins. From 1998 to 2003, the Canadian economy grew by an average 3.5 percent, which compares with 2.4 percent for all industrial countries and 2.8 percent for the United States. In fact, 2003 was the first year since 1999 that Canada’s real GDP grew less
Khalid ElFayoumi, Anta Ndoye, Miss Sanaa Nadeem, Gregory Auclair, and Mr. Nicolas R Blancher
productivity growth for many developing economies ( McMillan and Rodrik 2011 ). In addition, by directing job flows towards higher wage sectors, structural transformation can narrow laborproductivitygaps between sectors within the economy, promoting inclusive growth.
Nevertheless, there can be constraints to efficient labor reallocation. For emerging and frontier economies in particular, institutional frictions—in labor, financial and product markets, trade, governance, as well as the regulatory environment— can inhibit the optimal flow of jobs across sectors. Rigidities
Khalid ElFayoumi, Anta Ndoye, Miss Sanaa Nadeem, and Gregory Auclair
Institutional and market frictions impose costs on the reallocation of labor from low to high
productivity sectors, leading to suboptimal allocations and a loss in aggregate labor productivity.
Using cross-country sector-level data, we use a dynamic panel error correction model to compute
the speed of sectoral labor adjustment, as well as the contribution of structural reforms in
governance, labor and product markets, trade and openness, and the financial sector to lowering
the costs of labor reallocation. We find that, on average, sectoral employment shares converge
towards equilibrium allocations, closing about 13.7 percent of labor productivity gaps each year;
this speed of labor adjustment varies across sectors and income groups. On structural reforms, we
find a significant association between more efficient labor reallocation and financial market
liberalization, less bureaucracy, strong judicial and regulatory environment, trade liberalization,
better education and more flexible labor and product markets.
We examine the evolution of nontradable and tradable prices in the Indian economy over 1980-2002 and find widening differentials: the real exchange rate has been appreciating. This might seem unsurprising, since India's rapid per capita income growth suggests Balassa-Samuelson factors at play. However, after 1990, the tradable-nontradable labor productivity gap, the driver of real appreciation according to Balassa-Samuelson, virtually disappeared. So what explains the real appreciation? Assessing the role of both demand and supply factors, we find that demand pressures arising from higher income growth accounted for much of the relative price increase during the post-reform period. Falling import prices also contributed significantly, along with an increase in government spending.
differences in capital accumulation;
the other quarter of the gap is due to differences in TFP;
had New Zealand had the same capital intensity as in Australia, the laborproductivitygap would have been reduced to around 7 percent on average in the period (point C in Figure I.2 ).
Figure I.2 Labor Productivity, Capital Intensity and TFP in Australia and New Zealand (AUS=1), Averages 1988–1999.
32. The existence of different capital intensities between the two countries reflects different relative factor costs. Figure I.3 shows that the estimate of the
This study seeks to explain economic growth differences in an aggregate production function framework, where labor reallocation from agriculture to modern sectors influences labor efficiency growth. The econometric analysis uses a panel of 65 countries over 1960-90. The results highlight: (a) the differences in labor reallocation impact on growth, controlled for using the intersectoral wedge in labor productivities; (b) the significance of labor reallocation effects, even after controlling for capital accumulation, initial conditions, and country effects; (c) the role of slow labor reallocation in explaining the dummy variable for Sub-Saharan Africa; (d) the role of initial education levels in explaining differences in labor reallocation rates.