Complementarity and Transition to Modern Economic Growth

Complementarity and Transition to Modern Economic Growth

In developing countries, income per capita typically remains stagnant for long periods before taking-off. 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-specific and complements labor. This generates an S-shaped income growth for the dual economy, the effect 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 cross-sectional earnings equations implied by the model. We find the model simulated at these estimates captures well the nonlinear dynamics of aggregate earnings growth and inequality in Thailand.