Description: Job Market Practice Talk

Location: 368A Heady Hall

Contact: John Winters

Title: Endogenous Human Capital Growth and Structural Transformation

Abstract: Cross-country data show that structural transformation follows a hump-shaped pattern in manufacturing, with China’s share rising sharply with development while India’s remains subdued at comparable income levels. We develop a three-sector growth model with endogenous accumulation of high- and low-skill human capital and non-homothetic CES preferences over agriculture, manufacturing, and services to account for this divergence. Firms employ the two skill types with sector-specific factor intensities, and households have sector-specific income elasticities. The model maps structural parameters—income elasticities, factor-intensity profiles, and skill-acquisition rates—to the transitional path and the level of the manufacturing peak. We calibrate the model to China and India (1952–2015) by first constructing a measure of baseline human capital growth with constant TFP. Then, we include an exogenous, sector-specific residual TFP growth that supplements human capital growth, and the model reproduces about 70% of the observed change in sectoral value-added shares. Without TFP growth, the human-capital growth mechanism alone accounts for roughly 80% of the reallocation achieved when both channels operate. Additionally, we find that the higher growth rate of human capital among low-skilled workers in China compared to India is a key driver behind the gap.