There are two stages in the structural transformation of the economies which have succeeded in terms of industrialization and development. In the first stage, there is an absorption of surplus labour from the rural sector, outside agriculture in manufacturing, at existing levels of wages and productivity. This is associated with a decline in the share of agriculture and a rise in the share of manufacturing in output and in employment. The process can be described as the extensive margin of labour absorption. In the second stage, there is a transfer of labour from low productivity to high productivity occupations in the manufacturing sector while, at the same time, there is an increase in the average productivity of labour in the agricultural sector.
Real wages rise in both sectors.
There is a further increase in the share of manufacturing, and a further decrease in the share of agriculture in output and in employment. The process can be described as the intensive margin of labour-use. There is a third stage of structural transformation that emerges from the experience of the industrialized world. Once countries have industrialized and reached an advanced stage of economic development, the share of the manufacturing sector in both output and employment declines while the share of the services sector rises. Consequently, there are major differences in wages and productivity of labour which persist not only between sectors but also within sectors.