Sectoral Structural Change in a Knowledge Economy

The sectoral composition of US economy has shifted dramatically in the recent decades. At the same time, knowledge and information capital has become increasingly important in modern production process. This paper argues that a ready explanation for the recent sectoral structural change lies in the difference of intangible capital accumulation across sectors. In the two-sector model of the paper, as the importance of intangible capital increases, labor is shifted from direct goods production to creating sector-specific intangible capital. In the process, the real output and employment shares of the high-intangible sector increase. The model generates sectoral composition change and labor productivity trend that reasonably match the data. It also shows that conventional labor productivity calculation understates the "true" productivity in sectoral goods production. The underestimation is greater for the growing sector. The empirical regressions of the paper indicate a positive and significant association between intangible capital investment intensity and firms' future output and employment growth. The correlation is higher for firms in the growing sector. At the industry level, controlling for industry human capital intensity, physical capital intensity and IT investment level, intangible capital intensity is positively correlated with future industry real output and employment share growth. These findings are consistent with the implications of the model. The paper also presents evidence suggesting that most growing service industries are intangible capital intensive. Thus the theory developed here can also help to reconcile the expansion of the service sector and the seemingly low productivity of the sector.