We document the substantial process of structural transformation—the reallocation of labor between agriculture, manufacturing, and services—and aggregate productivity growth undergone by Portugal between 1956 and 1995. We assess the quantitative role of sectoral labor productivity in accounting for these processes. We calibrate a model of the structural transformation to data for the United States and use the model to gain insight into the factors driving the structural transformation and aggregate productivity growth in Portugal. The model implies that Portugal features low and roughly constant relative productivity in agriculture and services (around 22%) and a modest but growing relative productivity in manufacturing (from 44 to 110%). We find that productivity growth in manufacturing accounts for most of the reduction of the aggregate productivity gap with the United States and that a further closing of this gap can only be accomplished via improvements in the relative productivity of services.
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