A Simple Model of Sectoral Adjustment

Abstract

Despite the significance of limited labour mobility across sectors, few attempts have been made to produce dynamic models of sectoral adjustment which are consistent with perfect foresight and, yet, flexible enough to allow for a variety of dynamic experiments. This paper proposes a simple perfect-foresight model of two-sector economies, in which aggregate sectoral movement of labour takes place through the process of demographic change. The model is tractable enough that one can easily examine the effects of intertemporally complicated relative price shocks (both exogenous and endogenous) under a variety of assumptions on technology.