On development paths minimizing the aggregate labor-reallocation costs in the three-sector framework and an application to structural policy
Cross-sector labor reallocation is associated with costs at the micro level ranging from the costs of geographical relocation and skill change/adaptation to unemployment. We show that monotonous reallocation paths minimize the aggregate reallocation costs in the three-sector framework (relating to agriculture, manufacturing, and services), where we assume that the aggregate reallocation costs are indicated by the strength of cross-sector labor reallocation. By using this result and the (qualitative) labor-reallocation ‘laws’ based on the theoretical/empirical literature consensus, we derive the cost-minimizing development strategy for a developing country. We use these results to discuss some well-known structural/trade strategies and compare the historical reallocation costs across countries.
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