Seminario CEDE - Hernando Zuleta

We analyze the effect of a natural resource boom on the functional distribution of income. To do so, we consider a simple theoretical model with three sectors: tradable, non-tradable, and natural resources, and four factors of production: raw labor, human capital, natural resources, and physical capital. According to the theory, a natural resource boom generates a reallocation of factors from tradable sectors to non-tradable sectors. Consequently, the relative share of the factors in which non-tradable production is more intensive grows, while the relative share of the factors in which tradable production is more intensive falls. We also test the model using a data sample of 50 countries between 1995 and 2010. To address possible endogeneity issues, we exploit the cross-country variation in the exposure to China's increase in demand for commodities in the late 1990s and 2000s as an instrument for the price of natural resources. We find that a resource boom negatively affects the human capital to raw labor relative share, while the aggregate labor to physical capital relative share remains unchanged. These results suggest that a natural resource boom generates an attenuation effect on the increasing trend of the human capital to raw labor relative share.