Firm Size And Structural Change

The massive reallocation of labor and output from agriculture to manufacturingand services or structural change is a prominent feature of economic growth and devel?opment. Recent work has emphasized the importance of modeling structural changein explaining the evolutions of various economic aggregates. However, the traditionalexplanations for structural change fail to explain the sharper increase in services anddecline in manufacturing in the late phase of structural change. A preliminary exami?nation of U.S. data from1988to2007shows that the average ifrm size and value addedshare of a sector are highly positively correlated. A sector that has a higher growth ratein average ifrm size tends to have a higher growth rate in value added share. I thenstudy a multi-sector dynamic industry model in a closed economy and ifnd that the risein sectoral speciifc ifxed cost will raise a sector’s average ifrm size and value addedshare at the same time. In order to study the impact of changes in sectoral speciifcifxed costs on structural change quantitatively, I calibrate the model to match the U.S.data in services and manufacturing sectors from1988to2007. The quantitative resultsshow that the changes in sectoral speciifc ifxed costs could only account for less thantwo percent of the structural change in the U.S. from1988to2007. These results showthat the study of ifrm dynamics might be fruitful in understanding structural change,but further studies are needed.