The US structural transformation and regional convergence: A reinterpretation

We present a joint study of the U.S, structural transformation (the decline of agriculture as the dominating sector) and regional convergence (of sout hern to northern average wages), We find empirically that most of the regio nal convergence is attributable to the structural transformation: the natio nwide convergence of agricultural wages to nonagricultural wages and the fa ster rate of transition of the southern labor force from agricultural to no nagricultural jobs. Similar results describe the Midwest's catch-up to the Northeast (but not the relative experience of the West). To explain these o bservations, we construct a model in which the South (Midwest) has a compar ative advantage in producing unskilled labor-intensive agricultural goods. Thus it starts with a disproportionate share of the unskilled labor force a nd lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unsk illed) agricultural sector and into the (skilled) nonagricultural sector. T he decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Midwest) disproportion ately since it has more agricultural workers. With the addition of a less t han unit income elasticity of demand for farm goods and faster technologica l progress in farming than outside of farming, this model successfully matc hes the quantitative features of the U.S, structural transformation and reg ional convergence, as well as several other stylized facts on U.S, economic growth in the last century. The model does not rely on frictions on interr egional labor and capital mobility, since in our empirical work we find thi s channel to be less important than the compositional effects the model emp hasizes.