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Abstract: This paper studies industry level dynamics and demonstrates the ability of a modified neoclassical growth model to capture a range of empirical facts. The paper begins by using U.S. data to document skilled and unskilled labor trends within industry sector classifications as well as industry sector output trends. Using CPS data from 1968 to 2004, it is shown that the ratio of skilled workers to unskilled workers employed has risen in all industries. The absolute increase in this ratio was larger in the more skilled industries while the growth rate was larger in the less skilled industries. Furthermore, using national income account data it is shown that relatively high skilled industries have accounted for an increasing share of output over time. A version of the neoclassical growth model is then constructed to match these observations. One important feature of this model is a structure which introduces new goods into the economy at each moment of time. The model is able to capture a rich set of labor market movements between sectors and between skill levels as well as changes in the relative output shares across industries, yet preserves many nice features of the neoclassical growth model. This changing product mix, labor dynamics and changing industrial output composition can be interpreted with a Schumpeter viewpoint.
