Time-Varying Capital Intensities and the Hump-Shaped Evolution of Economic Activity in Manufacturing

Motivated by the observation of time-varying capital intensities in manufacturing, this paper puts forth a theory of structural transformation whereby changes in capital intensities account for the hump-shaped pattern in... [ view full abstract ]

Motivated by the observation of time-varying capital intensities in manufacturing, this paper puts forth a theory of structural transformation whereby changes in capital intensities account for the hump-shaped pattern in manufacturing employment shares as well as the decline in agriculture and the rise in services. The framework proposed includes time-varying capital intensities, varying rates of technological rates, long-run Engel curves and trade. I calibrate the model to the development experience of South Korea between 1970 and 2010 and show that with time-varying capital intensities, the model generates the observed hump-shaped pattern in manufacturing employment fairly close. I also show that in absence of this mechanism, the model fails to account for the steep decline in manufacturing at later stages of development. Time-varying capital intensities are the additional "labor push" needed to explain the observed movement of labor out of manufacturing. With the introduction of heterogeneous and time-varying capital intensities, the three main stylized facts in the literature of structural transformation (declining labor shares, hump-shape manufacturing shares and rising shares in services) are reflected in the model's equilibrium allocations of labor hours across sectors.