Environmental pollution as engine of industrialization

•Environmental pollution favouring industrialization.•Structural change in workers’ employment.•Is such a change always welfare-improving?•Global dynamics of a three-dimensional dynamic system.•Possible regime where the structural change, i.e. industrialization, is welfare-reducing.•Description of the surface separating two dynamic regimes. This paper analyzes the dynamics of a small open economy with two sectors (a farming sector and an industrial one), heterogeneous agents (workers and entrepreneurs) and free inter-sectoral labor mobility. Labor productivity in the first sector is negatively affected by environmental pollution generated by both sectors, whereas in the second sector it is positively affected by physical capital accumulated by entrepreneurs. Through a global analysis of the non-linear three-dimensional dynamic system of the model we derive conditions under which industrialization generates a decline in workers’ revenues in both sectors.