Xiaodong Zhu, University of Toronto
The correlation between the cyclical components of aggregate employment and GDP is highly positive in the US, but close to zero in China. We argue that the difference in the size of the agricultural sector is the reason for the difference in employment-output correlation. We construct a simple two-sector growth model with productivity shocks and non-homothetic preferences and show that the model can simultaneously account for the long-run structural change and short-run employment fluctuations at sector level and in the aggregate for both economies.
JEL Classification: E24, E32, O41
Keywords: Structural Change, Non-homothetic Preferences, Labor Reallocation, Aggregate Fluctuations