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Working Paper 329 - Human Capital, Productivity, and Structural Transformation


The rate of poverty reduction is often synonymous with the rate of structural transformation—the reallocation of economic activities (labor, land, and capital) across the broad sectors of agriculture, manufacturing, and services. This long-term process is at the center of economic development, so much so that the speed at which countries transform their economies is often equated with the pace at which poverty declines (Duernecker and Herrendorf 2016; Herrendorf, Rogerson, and Valentinyi 2013; McMillan et al. 2014). Indeed, it was through this long-term process of shifting economic activities from traditional to modern sectors that today’s advanced economies pulled their populations out of poverty (McMillan et al. 2014). One of the channels through which structural transformation improves welfare is through higher employment in high-productivity sectors. In addition, structural transformation has important implications for labor productivity growth, hours worked, urbanization, and key features of the labor market, such as labor force participation and job polarization (Ngai and Petrongolo 2017; Barany and Christian 2018; Duernecker and Herrendorf 2015).

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