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This paper considers an economy where labor is indivifible and agents are identical Although the discontinuity in labor supply at the individual leve! disappears as a result of aggregation, it is shown that indivisible labor has strong consequences for the aggregate behavior of ~he economy. It is also shown that optimal allocations involve lotteries over employmem and cor~umption. *I am indebted to Ed Prescott for his guidance. I ha~,e benefited from conversatio~ with John Geaneakoplos. Vittorio Grilii, Rol:ert King, Glenn MacDonald, Rodolfo Manuelli, Walter Oi, and the comments of an anonymous referee. Financial support from the Social Sciences and Humanities Research Council of Canada and NSF Grant No. S~S-85!0861 is gratefully acknowledged.

Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi-sector extension of the one-sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi-sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi-sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality. We conclude by suggesting several directions for future research on structural transformation.

2 Technically we should assume a small endowment of the nonagricultural good that is always consumed to avoid the fact that instantaneous utility is lowered when c increases from zero to a small positive amount. We ignore this for simplicity. 3 There are theoretical reasons to believe that a value close to a is appropriate. Models with endogenous fertility suggest that output per capita will be close to subsistence levels for economies that have not begun the process of industrialization. See Hansen and Prescott (forthcoming) and Oded Galor and David Weil (2000).

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We survey search-theoretic models of the labor market and discuss their usefulness for analyzing labor market dynamics, job turnover, and wages. We first examine single-agent models, showing how they can incorporate many interesting features and generate rich predictions. We then consider equilibrium models that endogenize several variables that are treated parametrically in single-agent models, including the arrival rate of job offers and the wage distribution. We survey alternative formulations of these models, emphasizing two key issues: how workers and firms meet, and how wages are determined. We emphasize throughout the implications of alternative assumptions for turnover, wage dispersion, and efficiency.

We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for crosscountry differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP.