Tradability and sectoral productivity differences across countries

Sectoral differences are generally argued to be important for understanding cross-country productivity differences. In this paper we argue that traded versus non-traded is a key distinction as we find that productivity in the non-traded sector does not systematically vary with a country’s income level, compared to other two-way splits that are less distinctive. We base our analysis on newly developed measures of sectoral relative prices and productivity for 84 countries across 3 years. These data incorporate several recent measurement advances to provide more reliable estimates than previous studies, notably allowing us to relax the common assumption of a constant marginal product of labor across sectors. Relaxing that assumption and recognizing the tradability of some services industries are important to our main finding. These results emphasize the importance of reducing trade costs for enhancing productivity.