The Structural Transformation Between Manufacturing and Services and the Decline in U.S. GDP Volatility

For a single \u85rm with a given volatility of total factor productivity at the gross output level (GTFP), the volatility of total factor productivity at the value added level (YTFP) increases with the share of intermediate goods in gross output. For a Cobb-Douglas production function in capital, labor and intermediate goods, YTFP volatility is equal to GTFP volatility divided by one minus the share of intermediate goods in gross output. In the U.S., this share is steadily around 0.6 for manufacturing and 0.38 for services during the 1960-2005 period. Thus, the same level of GTFP volatility in the two sectors implies a 55 % larger YTFP volatility in manufaturing. This fact contributes to the higher measured YTFP volatility in manufacturing with respect to services. It follows that, as the services share in GDP increases from 0.53 in 1960 to 0.71 in 2005 in the U.S., GDP volatility is reduced. I construct a two-sector dynamic general equilibrium input-output model to investigate the role of the sectorial reallocation between manufacturing and services in reducing U.S. GDP volatility. Numerical results for the calibrated model economy suggest that the sectorial reallocation can account for almost a half of the 56 % GDP volatility di¤erence between the 1960-1983 and the 1984-2005 periods. When the highly volatile period 1973-1983 is excluded, the sectorial reallocation alone is able to account for the entire di¤erence in GDP volatility between the 1960-1973 and the 1984-2005 periods