Structural change and income inequality: Evidence from Thailand

Abstract

Structural change is the contraction of agriculture as a share of both aggregate economic output and employment and the corresponding expansion of the combined shares of industry and services. First, we describe this process in the context of Thailand, a country experiencing significant structural change in recent decades. Second, we analyse its causes using a simple, comparative static computable general equilibrium model of the Thai economy, operated in long-run mode. We test the explanatory power of three hypotheses about the causes of structural change: differences in the growth rates of aggregate factor supplies (the Rybczynski effect; sectoral differences in total factor productivity growth; and the differences between commodities in expenditure elasticities of demand (Engel’s law). The first two hypotheses operate on the supplyside of the economy, implying changes in the shape of the production possibility frontier (PPF). The third, a demand-side effect, implies changes in output prices during growth that induce movements around the PPF. The results indicate that the first two explanators predict the observed structural change accurately, but that the third, Engel’s law, predicts poorly. Third, we use the above framework to study the impacts these drivers of structural change have on the functional distribution of incomes. The results show that the explanators of structural change do not predict the observed changes in factor income shares. We conclude that these two phenomena have different drivers and that stable empirical relationships between them should not be expected.