Specialization, Agriculture, and Cross-Country Productivity Differences

Cross-country labor productivity differences are larger in agriculture and smaller in nonagriculture than in the aggregate. We argue that these sector productivity differences arise when subsistence consumption needs prevent workers in poor countries from specializing in the sector in which they are most productive. We formalize our theory in a generalequilibrium Roy model in which the agents’ preferences feature a subsistence consumption constraint. A parameterized version of the model predicts that output per worker gaps are substantially larger across countries in agriculture than non-agriculture even though countries differ only by a economy-wide efficiency term which affects the two sectors uniformly.