Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income
AbstractThis paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven Ã¡uctuations) in a one-sector growth model. Our analysis employs a Ã¬normalizedÃ®version of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that laborÃs share of income becomes pro-cyclical as the elasticity of substitution increases above unity, whereas laborÃs share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity.
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Bibliographic InfoPaper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200804.
Length: 17 pages
Date of creation: Apr 2008
Date of revision: Apr 2008
Capital-Labor Substitution; Equilibrium Indeterminacy; Capital Utilization; Real Business Cycles; Labor Income;
Other versions of this item:
- Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income," Working Paper Series 2008-06, Federal Reserve Bank of San Francisco.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-03 (All new papers)
- NEP-BEC-2009-06-03 (Business Economics)
- NEP-DGE-2009-06-03 (Dynamic General Equilibrium)
- NEP-MAC-2009-06-03 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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