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The Neoclassical Growth Model and the Labor Share Decline

Author

Listed:
  • Mahone Zachary L.

    (McMaster University, Hamilton, Canada)

  • Naval Joaquín

    (Universitat de Girona, Girona, Spain)

  • Pujolas Pau S.

    (McMaster University, Hamilton, Canada)

Abstract

The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM). We assess the quantitative importance of this discrepancy by comparing alternative calibration approaches featuring constant and declining labor shares. We find little difference in model performance. Our results derive from strong general equilibrium effects: while a declining labor share mechanically lowers wage growth, the investment response pushes wages back up. Hence, different models deliver nearly identical paths of macro aggregates. Numerous robustness checks (including a CES production function, different time periods, and calculations of the labor share) reinforce the similarity of performance across model specifications. We conclude that the NGM with a constant labor share is still an appropriate choice to study many standard macro aggregates.

Suggested Citation

  • Mahone Zachary L. & Naval Joaquín & Pujolas Pau S., 2021. "The Neoclassical Growth Model and the Labor Share Decline," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 607-628, June.
    • Handle: RePEc:bpj:bejmac:v:21:y:2021:i:2:p:607-628:n:1
    DOI: 10.1515/bejm-2020-0254
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    References listed on IDEAS

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    1. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "The productivity slowdown and the declining labor share: a neoclassical exploration," CEP Discussion Papers dp1504, Centre for Economic Performance, LSE.
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    Keywords

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    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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