Sectoral Structural Change in a Knowledge Economy
38 Pages Posted: 20 Sep 2009 Last revised: 21 Jun 2010
Date Written: June 1, 2010
The sectoral composition of the US economy has changed dramatically in the past six decades. At the same time, knowledge and information assets are becoming increasingly important in the value creation process of a modern economy. This paper aims to explain the recent sectoral structural change from the perspective of differences in intangible capital accumulation across sectors. In the two-sector model of the paper, as the importance of intangible capital increases in the production functions -- but at different rates across sectors -- labor is shifted from direct goods production to creating sector-specific intangible capital. At the mean time, the real output and employment shares of the high intangible sector increase.
The implications of the model are consistent with the following stylized facts in US economy: (1) the high intangible sector has expanded in both output and employment; (2) intangible capital investment increases in both sectors; (3) the economy's employment composition is shifting towards occupations engaging in intangible investment activities; (4) both sectors' labor productivity growth has declined over time, especially for the high intangible sector.
I further test the relationship between intangible capital and structural change at more disaggregate levels. The industry-level results suggest that an industry's future growth in output and employment is strongly correlated with its intangible capital intensity. The firm-level results show that the industries in which firms' intangible investments have a higher impact on firm production tend to grow more. Both results are consistent with the theory of the paper.
The industry level data also indicates that the expanding service industries are primarily intangible capital intensive. Thus the theory developed in this paper also helps to explain the rise of the service sector in recent decades.
Keywords: Structural Change, Intangible Capital, Knowledge Capital, Industrial Dynamics, Business Investment
JEL Classification: E13, E17, E22, E23, E25, J22, O31, O41
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