Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective

Thu, 01 Jan 2026 00:00:00 +0000

This paper asks why the nature of business cycles changes systematically as economies develop and shed their large agricultural sectors. The motivation is both empirical and theoretical. Empirically, countries with large declining agricultural sectors—most prominently China—exhibit business cycle patterns that depart sharply from the textbook procyclical-employment pattern seen in mature economies: aggregate employment is acyclical with respect to GDP, nonagricultural employment is strongly procyclical, agricultural employment is countercyclical, and the labor productivity gap between nonagriculture and agriculture narrows during booms. These cross-country regularities hold in a sample of 63–66 countries using ILO sectoral employment data over 1970–2015, with the correlation between aggregate employment and GDP declining monotonically as the agricultural employment share rises. The cross-country correlation between the agricultural employment share and log GDP per capita is −0.84. For China specifically over 1978–2012, the correlation between HP-filtered agricultural employment and GDP is −0.69, while the correlation for nonagricultural employment with GDP is 0.73. Agricultural employment fell from about 62.4% of total Chinese employment in 1985 to 33.6% in 2012.

Bo Zhao | Macro Paper Warehouse

Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective