De-industrialization of the Riches and the Rise of China

This paper studies the impact of the industrialization of China on the U.S. industrial employment share between 1978 and 2005. A comparison of the predictions of open and closed economy models suggests that a common explanation of de-industrialization in the literature, which is based on increased productivity in industry relative to services in a closed economy setting, is not compelling. My benchmark results suggest that the closed economy model accounts for 38.1 percent of the declines in the U.S. industrial employment share while the open economy accounts for 68.0 percent of the de-industrialization in the U.S. between 1978 and 2005. Moreover, the open economy model has more explanatory power to explain the secular changes in the U.S. industrial employment share in the post-1990 period. The open economy model accounts for 85.1 percent of the de-industrialization while the closed economy accounts for 37.4 percent of the de-industrialization in the U.S. between 1992 and 2005. Counterfactual experiments show that if the Chinese economy had experienced productivity in industry equal to that of the U.S., then the role of openness would have been diminished. The higher the elasticity of substitution between home and foreign industrial goods is, the more accelerated structural transformation in the U.S.