Abstract
Manufacturing’s share of employment is known to follow a hump-shaped pattern as economies structurally transform. Motivated by the observation that sectoral capital intensities evolve over time, this paper examines whether such changes are important in accounting for this pattern. It does this by putting forth a structural transformation theory that allows for time-varying capital intensities, heterogeneous TFP, Engel curves and trade. The model is calibrated to South Korea (1970–2010), a country for which the rise and decline of the manufacturing employment share occurred within four decades for which comprehensive measures of sectoral capital income shares are available. I show that whereas traditional drivers matter for various elements of development, time-varying capital intensities are critical for generating the complete hump-shaped pattern in manufacturing employment: Time-varying capital intensities trigger an additional “push” of labor out of manufacturing, generating differences between employment and value added shares that are in line with the observed patterns of structural transformation in South Korea.
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