grows richer, the resource allocation changes as households do not raise their expenditure proportionally across all goods (Kongsamut _et al._ (2001)). The second explanation hinges on differential exogenous productivity growth across sectors that alter the relative prices of goods over time (Baumol (1967), Ngai & Pissarides (2007)). Because of its association with changes in income, the first mechanism is often referred to as income-effects while the second mechanism is referred to as price-effects owing to its association with changes in relative prices.<sup>6</sup> Figure 5 plots the implied change in employment shares for industry and manufacturing during 1995–2010/11 against the GDP per capita in 1995. Under the scenario that all countries in the region follow a similar path, the income-effects require that changes in employment shares be positive and higher at lower incomes before turning negative at a threshold income. These changes deliver the hump-shaped behavior in levels. Apropos industry, the figure shows an inverse relationship between the changes in employment shares and incomes after taking out Argentina and Mexico. The implied changes for the two countries are not only high at the levels of their incomes, but they are also positive. Though still in line with the negative relationship, the implied contraction for Costa Rica is much higher for its income level. The inverse relationship is more apparent in manufacturing where Mexico no longer appears separate from the pack. Nonetheless, there is no perceptible change for Argentina where implied gains remain highest even though it has the highest income per capita in the region.

Of course, it is feasible that paths of transformation differ across countries and that implied changes for Argentina and Mexico will still follow a downward trend individually. The price-effect mechanism can potentially help in resolving these deviations. Empirical analyses in different settings have found the elasticity of substitution in consumption across sectoral goods to be less than unity. This complementary association implies that the sector with relatively higher productivity growth loses its share as its price relative to other sector goods falls. Figure 6 plots the change in employment shares against the excess of labor productivity growth in the sector over the aggregate labor productivity growth.<sup>7</sup> For example, the industrial labor productivity growth during the period in Costa Rica outpaced the aggregate labor productivity growth by roughly 40 percent. A compelling inverse relationship between the two variables is evident with regards to the aggregate industrial sector. Changes in consumption shares imply substantial reductions in employment shares in Chile and Costa Rica where industrial productivity growth has far exceeded the growth in aggregate productivity. Concurrently, the consumption shares have shrunk in Argentina and Mexico in line with the industrial productivity growth lagging behind the aggregate. However, Peru and to some extent Brazil deviate from the broad trend when seen

> 6The analysis in this paper focuses on changes in final consumption shares which is different from changes in value-added shares. In essence, the two effects are applicable when specifying either final goods or value-added production functions at the sectoral level. Nonetheless, the relative importance of the two effects is not necessarily independent of the specification. For instance, Herrendorf _et al._ (2013) explores the relative influence of the two effects in accounting for the transformation of the post-war US economy.

> 7Labor productivity is measured as real value-added per worker using data from the GGDC 10-Sector database.

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