Steps in industrial development through human capital deepening

Abstract

This paper presents a model in which human capital is deepened, education time increases, and labor shifts away from agriculture. These notable trends in industrial development accompany incremental steps upward in the level of education productivity. As education grows, human capital becomes relatively abundant and industries react by deepening their investment in human capital. Industries that use human capital relatively more intensively experience relatively lower prices and higher output. New industries are assumed to emerge in step with education productivity. Each new industry is assumed to have a relatively higher human capital factor share. As human capital deepening occurs, labor shifts toward the new industry and away from traditional industry. I delineate these features by extending a well-known model of endogenous economic growth through human capital investment. The extension disaggregates output into separate industries with different shares of the human capital factor. This enables trademark features of industrial development. The model explains rising education levels, growth, and labor reallocation using a minimally complex approach that jointly explains stylized facts through human capital deepening within each industry.