It plots the agricultural employment in Brazil, from 1960 to 2010, separately for different ten-years birth cohorts. Following a cohort of individuals as they age, we see that fewer and fewer of them work in agriculture: this suggests that the returns from agricultural production has decreased over time, thus pushing workers to reallocate. At the same time, if we compare across cohorts in any single year, we see that the younger ones have a smaller fraction of the workers in agriculture, suggesting that – due to their higher human capital – they have a stronger comparative advantage towards non-agriculture. Over time, higher human capital cohorts enter the labor market and replace lower human capital ones, thus contributing to an aggregate decrease in agricultural employment. Not all countries look like Brazil. As a comparison, in Figure 1b we plot a similar graph for India: in this case, within cohorts reallocation over time is mostly muted, while we still observe sizable across-cohort reallocation. In this paper, we systematically document this heterogeneity across countries, and exploit it to draw general conclusions on the role of human capital. More in general, however, the simple insight on the map between reallocation by cohort and human capital might fail, since cohorts possibly differ for aspects other than their human capital. In particular, younger cohorts may face lower mobility frictions to change sector. A core contribution of this paper is to develop a simple model to analytically characterize how the reallocation within and across cohorts can be used to back out the role of human capital, taking into account both mobility frictions and general equilibrium interactions across-cohorts. Equipped with the model, we use micro-level data for 52 countries to systematically document new facts on reallocation by cohort,square plastic planter along the lines of what just described for Brazil and India.
We then use data and theory together to back out the role of human capital and to show our two main results: human capital explains, on average, approximately one third of labor reallocation; but it does not explain why some countries have faster reallocation than others. We also show that mobility frictions play a minor role, which is instrumental in using reallocation by cohort to derive the main results. Finally, we turn back to schooling, and compare our approach with a direct measurement of human capital stocks using schooling. The two approaches are complementary.The paper is organized in four sections. In Section 2 we present a dynamic overlapping generation model. The model provides an accounting framework to leverage labor reallocation by cohort to quantify the relative role of human capital in aggregate labor reallocation out of agriculture. The general features of the model are the following: time is discrete; a finite number of cohorts are alive at each point in time; each period a cohort of individuals is born and enters the labor market and one dies; individuals are heterogenous in their human capital both within and across cohorts; average human capital grows across cohorts at a constant rate; there are two sectors: agriculture and non-agriculture; agriculture uses land and labor to produce; non-agriculture uses human capital; agricultural relative price and productivity, which give the relative revenue productivity, are exogenous and decrease at a constant rate; individuals choose, in each period in which they are alive, in which sector to work subject to two mobility frictions: a one time fixed cost to be paid to change sector, and an iceberg-type cost that reduces the monetary value of non-agricultural wage each period; markets are complete and competitive. We analytically characterize the equilibrium, which displays sorting across sectors, both within and across cohorts, and labor reallocation out of agriculture. We provide three sets of theoretical results. First, we show that the rate of labor reallocation out of agriculture is constant, does not depend on either mobility friction, and is increasing in the growth rate of relative non-agricultural revenue productivity, and in the growth rate of human capital across cohorts.
This result highlights the two core forces that lead to labor reallocation out of agriculture: decrease relative agricultural price and productivity; increase in human capital. Second, we decompose the rate of labor reallocation in two components: a year effect, which captures the rate at which a given cohort reallocates out of agriculture; and a cohort effect, which captures the gap in agricultural employment across cohorts. And we show that, absent mobility frictions and ignoring general equilibrium, the year effect pins down the relative contribution of prices/productivity, while the cohort effect pins down the relative contribution of human capital accumulation. This special case corresponds to our simple insight on the role of reallocation within and across cohorts. However, in general, mobility frictions and general equilibrium complicate the analysis, by tying together year and cohort effects. The theory provides further useful guidance: we show that only fixed costs are relevant to determine labor reallocation by cohort, and that old workers are more likely to be constrained by a fixed cost, since they have fewer periods to depreciate it over. As a result, comparison of labor reallocation rates across age groups informs us on the size of the frictions. Third, in search of additional ways to discipline the size of the mobility frictions, we describe how they affect the agricultural wage gap. We show that the wage gap for movers out of agriculture can be used to identify iceberg-type frictions – such as amenity costs that have to be paid each periods. However, we also show that fixed-cost-type frictions, which are the more relevant ones for our purpose, since they affect the map between cohorts effects and human capital, cannot cannot be inferred from wages. In fact, a small wage gap for movers out of agriculture is consistent with an arbitrarily large fixed cost. In Section 3 we turn to the data. In this section we describe three novel empirical results,leaving their interpretation through the lens of the model to Section 4. We use micro level data available from IPUMS international for 52 countries around the world. The data are either censuses or large sample labor force surveys representative of the population. For each country, we have at least two repeated cross-sections distant 10 years apart. On average, for each country there are 28 years from the oldest to the most recent cross-section. For some countries, such as Brazil, our data cover half a century of labor reallocation.
The 52 countries cover roughly 2 3 of the world population, and span five continents and the income distribution from Liberia to the United States. For each country, we compute year and cohort effects as defined in the model. On average, year and cohort effects are of similar size, thus giving our first empirical result: the across-cohortsreallocation accounts on average for approximately half of the overall labor reallocation out of agriculture. The year effects are strongly correlated with the rate of labor reallocation, while the cohort effects are more similar across countries, and less strongly correlated with the overall rate of reallocation. Formally, we decompose the cross-country variance of the rate of labor reallocation and show that differences in the across-cohorts reallocation explains approximately one quarter of it, which is our second empirical result. Finally, we compute for each country, the year effect separately for individuals of different ages, and show our third empirical result: individuals of different ages have similar year effects. Section 4 uses theory and data together to decompose, in an accounting sense, the relative roles of human capital and prices/productivity for labor reallocation out of agriculture. First, we show that, without taking a stand on the size of the frictions or the strength of general equilibrium,square plastic plant pot we are able to provide an upper bound to the relative contribution of human capital: the first empirical results above directly implies that human capital accounts for at most half of average labor reallocation. That is, absent human capital accumulation the average rate of labor reallocation out of agriculture could be as low as just half the observed one. Second, we use our theoretical results to infer a value for the mobility frictions, and thus be able to provide a point estimate for the role of human capital in partial equilibrium. To back out the size of the friction, we follow two different approaches. First, we use the prediction on reallocation rates by age: the third empirical result above is not consistent with sizable mobility frictions, which would imply that old individuals reallocate at slower rates. Second, we show that, under the assumption that the mobility friction is constant within a subset of countries, the second empirical result above is not consistent with sizable mobility frictions either: mobility frictions tie together the cohort and year effects, and thus would predict that countries with faster labor reallocation have both larger year and cohort effects. The data reject this hypothesis as well. Therefore, both approaches are not consistent with a large role for frictions. In fact, we show that, in partial equilibrium, human capital accumulation accounts for 37 − 56% of average labor reallocation, depending on the chosen estimate for the frictions. Third, an elementary calibration exercise suggests that the general equilibrium forces are unlikely to overturn the quantitative results: taking into account general equilibrium reduces the role of human capital accumulation to 19−52%. Using our favorite estimates for the size of the friction and for the GE calibration, we obtain that human capital accounts for approximately one third of labor reallocation out of agriculture. Fourth and last, we focus, rather than on the average rate of labor reallocation, on its variance across countries.
We show that, while human capital explains a sizable fraction of labor reallocation on average, it has at most a minor role in explaining why some countries have faster rate of labor reallocation than others. Finally, in Section 5 we turn back to the usual approach of the literature and exploit schooling as a direct measure of human capital. Using schooling is useful for two purposes. First, it allows us to validate the main empirical approach, by showing that our model-inferred human capital stocks align well with direct measurement through schooling, both in levels and in changes across cohorts. Second, using schooling enables us to provide a proof of concept on the possibility that policies designed to increase human capital can trigger labor reallocation out of agriculture. We follow closely Duflo and exploit the INPRES school construction program in Indonesia as an exogenous variation in schooling. We show that the exogenous increase in schooling decreased the agricultural employment of the affected cohorts.We draw upon insights from a rich literature on related topics. We here discuss our contribution relative to the most closely related articles. Our work builds on the seminal work of Caselli and Coleman II and Acemoglu and Guerrieri . To our knowledge, Caselli and Coleman II first recognized the interaction between aggregate changes in human capital and structural change. It noticed that non-agriculture is more skill-intensive than agriculture, and, therefore, an aggregate increase in schooling raises the relative supply of non-agricultural workers. It focused on the effect of human capital increase on relative wages, and argued that taking it into account is necessary to match the path of relative agricultural wages. Acemoglu and Guerrieri formalized the general insight that changes in the relative prices of inputs may lead to structural transformation if sectors vary in the intensity with which they use inputs. In its analysis, Acemoglu and Guerrieri considered capital and labor as the two inputs of interest. We owe to these two papers the broad notion that human capital accumulation may be relevant in explaining reallocation out of agriculture. Relative to their work, our contribution is to provide an accounting framework and to use reallocation by cohorts to separately account for the role of human capital relative to the role of relative agriculture prices/productivity . As discussed in the introduction, the recent literature that studies the cross-sectional allocation of heterogeneous workers to sectors motivates us to interpret human capital accumulation as a change in the relative supply of agricultural labor.At the same time, in our work we bundle together the traditional views of structural change that focus on demand or supply of agricultural goods, since they both similarly affect the relative revenue productivity of agriculture, hence the demand for agricultural labor.