Sectoral Imbalances and Long-Run Crises

In this paper we propose an interpretation of the current Global Financial Crisis that emphasizes sectoral dislocation following localized technical change in the presence of barriers to labor mobility. This tale is reminiscent of the Great Depression. In the 1930s, technical change was localized in agriculture, where wages fell because of the costs of moving out of agriculture for unemployed workers. Shrinking wages in agriculture reverberated in the other sectors, causing a large depression. Now, it is manufacturing that plays the role of epicenter of technical change. Falling wages in manufacturing yield a lack of demand for goods produced in the rest of the economy, especially the service sector. This may be the underlying cause of the long-lasting slump and the painfully slow recovery.