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

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). Whereas traditional drivers matter for various elements of development, time-varying capital intensities are critical to account for the “push” out of manufacturing and for differences between employment and value added