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Cross-country Variation in Factor Shares and its Implications for Development Accounting

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  • Brad Sturgill

Abstract

The stability of factor shares has long been considered one of the “stylized facts” of macroeconomics. However, the relationship between cross-country factor shares and economic development is dependent on how factor shares are measured. Most factor share studies acknowledge only two factors of production: total capital and total labor. The failure to acknowledge more than two factors yields misleading results. In the first part of the paper, I distinguish between reproducible and non-reproducible factors of production. I disentangle physical capital’s share from natural capital’s share and human capital’s share from unskilled labor’s share. Results reveal that non-reproducible factor shares decrease with the stage of economic development, and reproducible factor shares increase with the stage of economic development. This suggests that studies relying on the macroeconomic paradigm of constant factor shares should be revisited. Development accounting nearly always assumes the constancy of factor shares. In the second part of the paper, I perform the development accounting exercise but allow factor shares to vary and distinguish between reproducible and non-reproducible factors. My approach yields results that stand in stark contrast to those previously attained. The general consensus is that at least half of the cross-country variation in output per worker accrues to the Total Factor Productivity (TFP) residual. With my approach, the majority of variation in output per worker accrues to factor shares, specifically physical capital’s share and natural capital’s share. The explanatory power of the TFP residual decreases by more than 30 percentage points. This evidence does not, however, diminish the role of technical change. Rather, the evidence indicates the importance of acknowledging a new type of technical change, one that impacts factor shares.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_014.

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Length: 43 pages JEL Classification: E25, O30, O11
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:deg:conpap:c015_014

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Keywords: factor shares; TFP residual; development accounting; technical change;

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References

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Cited by:
  1. Zuleta, Hernando, 2009. "If factor shares are not constant then we have a measurment problem. can we solve it?," DOCUMENTOS DE TRABAJO 005744, UNIVERSIDAD DEL ROSARIO.
  2. Thomas Bassetti & Donata Favaro, 2011. "A Growth Model with Gender Inequality in Employment, Human Capital, and Socio-Political Participation," CHILD Working Papers wp14_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  3. Zuleta, Hernando, 2012. "Variable factor shares, measurement and growth accounting," Economics Letters, Elsevier, vol. 114(1), pages 91-93.
  4. Carolina Arteaga Cabrales, 2011. "Human Capital Externalities and Growth," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  5. Brian Piper, 2014. "Factor-Specific Productivity," Working Papers 1401, Sam Houston State University, Department of Economics and International Business.
  6. Hernando Zuleta & Julián Parada & Andrés García & Jacobo Campo, 2010. "Participación factorial y contabilidad del crecimiento económico en Colombia .Una propuesta de modificación del método de contabilidad del crecimiento," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  7. Bassetti, Thomas & Favaro, Donata, 2009. "A growth model with time allocation and social participation," MPRA Paper 15969, University Library of Munich, Germany.
  8. Marcello Spanò, 2012. "The Effect Of Openness On Foreign Reserves And Growth In The Emerging Economies," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 7-23, March.
  9. Hernando Zuleta, 2011. "Factor Shares, Income Distribution and Capital Flows," DEGIT Conference Papers c016_003, DEGIT, Dynamics, Economic Growth, and International Trade.

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