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

Abstract We document that business cycle dynamics change systematically over the course of development. In countries with large but shrinking agricultural sectors, aggregate employment is uncorrelated with GDP, and agricultural employment falls during booms, even as agricultural labour productivity rises. We develop a unified theory of business cycles and structural change that captures these patterns. The theory emphasises the simultaneous decline and modernisation of agriculture, driven by cap