Windfall Resource Income, Productivity Growth, and Manufacturing Employment

I study the independent impacts of windfall income from non-renewable resource exports and productivity growth on the changing share of employment in manufacturing in an open economy. The framework includes non-unitary income and substitution elasticities, so that both windfall income and productivity growth lead to sectoral reallocation of labor. I use the model to account for the declining share of manufacturing employment in Canada. I find that the relative importance of these factors has varied over time. While productivity growth is responsible for a substantial fraction of the decline in the share of manufacturing employment since 1960, the windfall income from the booming resource sector contributed to this decline significantly during the 2000s, when the Canadian terms of trade improved rather dramatically.