Agricultural composition and labor productivity

Labor productivity differences between developing and developed countries are much larger in agriculture than in non-agriculture. We show that differences in agricultural composition across countries explain a substantial part of these labor productivity differences. To this end, we group agricultural products into two sectors: capital-intensive and labor-intensive agriculture. As the economy develops and capital accumulates, the price of labor-intensive agricultural goods relative to capital-intensive agricultural goods increases. This price change drives a process of structural change that moves land and farmers to the capital-intensive sector, increasing labor productivity in agriculture. We illustrate this mechanism using a multisector growth model that generates transitional dynamics consistent with patterns of structural change observed in Brazil and also differences in agricultural composition and labor productivity consistent with cross-country data. •We group agricultural products into two sectors: capital-intensive and labor-intensive agriculture.•As the economy develops, land and farmers move to the capital-intensive sector.•Structural change within agriculture increases productivity of agriculture relative to non-agriculture.•Structural change explains 24.8% of the observed increase in relative productivity of Brazil in the period 1960–2018.•Structural change also explains 27.5% of the observed differences across countries in relative productivity.