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Elasticity of factor substitution and the rise in labor's share of income during the Great Depression

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Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)

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Abstract

The sudden rise in labor's share of income during the U.S. Great Depression of 1929-1933 is examined. To explain this phenomenon, the deflation-based model of the Great Depression of Bordo et al. (2000) [Bordo, M.D.; Erceg, C.J.; Evans, C.L. "Money, Sticky Wages, and the Great Depression." American Economic Review 90:5, 1447-63.] is extended to the case of a Constant Elasticity of factor Substitution (CES) production function. It is shown that considering the low elasticity of factor substitution allows the model to explain the rise in labor's share of income, improves the model's predictions on other macroeconomic variables, and renders the issue of productivity during the Great Depression less puzzling.

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Date of creation: 23 Sep 2009
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