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Labor-Augmenting Technical Change and the Labor Share: New Microeconomic Foundations

Author

Listed:
  • Daniele Tavani

    (Department of Economics, Colorado State University)

  • Luca Zamparelli

    (Department of Economics and Law, Sapienza University of Rome)

Abstract

An important question in alternative economic theories has to do with the relationship between the functional income distribution and the growth rate of labor productivity. According to both the induced innovation hypothesis and Marx-biased technical change, labor productivity growth should be an increasing function of the labor share. In this paper, we first discuss the shortcomings of both theories and then provide a novel microeconomic foundation for a direct relationship between the labor share and labor productivity growth. The result arises because of profit-seeking behavior by capitalist firms that face a trade-off between investing in new capital stock and innovating to save on labor costs. Embedding this finding in the Goodwin (1967) growth cycle model, we show that: i) the resulting steady state is locally stable; ii) unlike in the original Goodwin model, the long-run employment rate is sensitive to investment decisions; finally, iii) we numerically identify parametric configurations that establish whether convergence to the long-run growth path is cyclical or monotonic.

Suggested Citation

  • Daniele Tavani & Luca Zamparelli, 2020. "Labor-Augmenting Technical Change and the Labor Share: New Microeconomic Foundations," Working Papers 2/20, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:2/20
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    References listed on IDEAS

    as
    1. Arindrajit Dube & T. William Lester & Michael Reich, 2016. "Minimum Wage Shocks, Employment Flows, and Labor Market Frictions," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 663-704.
    2. Olivier Allain, 2015. "Tackling the instability of growth: a Kaleckian-Harrodian model with an autonomous expenditure component," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 39(5), pages 1351-1371.
    3. Allen,Robert C., 2009. "The British Industrial Revolution in Global Perspective," Cambridge Books, Cambridge University Press, number 9780521868273.
    4. Foley, Duncan K., 2003. "Endogenous technical change with externalities in a classical growth model," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 167-189, October.
    5. Mauro Caminati & Serena Sordi, 2019. "Demand‐led growth with endogenous innovation," Metroeconomica, Wiley Blackwell, vol. 70(3), pages 405-422, July.
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    Cited by:

    1. Jose Barrales‐Ruiz & Ivan Mendieta‐Muñoz & Codrina Rada & Daniele Tavani & Rudiger von Arnim, 2022. "The distributive cycle: Evidence and current debates," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 468-503, April.
    2. Jose Barrales-Ruiz, Ivan Mendieta-Muñoz, Codrina Rada, Daniele Tavani, Rudiger von Arnim, 2020. "The distributive cycle: Evidence and current debates," Working Paper Series, Department of Economics, University of Utah 2020_07, University of Utah, Department of Economics.

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    More about this item

    Keywords

    Endogenous Technical Change; Income Shares; Labor Productivity; Employment;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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