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How a 50 percent decline in the cost of innovative capital reshapes labor share and prices

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  • Frish, Roni

Abstract

In the past few decades, the labor share of national incomes has fallen in many economies, as the price of innovative capital—particularly information and communication technology (ICT)—dropped sharply. Drawing on an open-economy framework with two sectors, the results reveal that although lower ICT capital costs initially boost labor demand and drive up wages by raising the marginal product of labor, they ultimately reduce the labor share through accelerated production growth. This effect is particularly pronounced in the tradable sector, which relies heavily on innovative capital. According to our calibrations, a 50 % decline in ICT capital prices reduces the labor share by 3 % points in the tradable sector and by 0.7 % in the nontradable sector, while also driving up nontradable goods prices. Looking ahead, if emerging technologies (e.g., artificial intelligence) transform the nontradable sector into the most intensive user of innovative capital, further price declines will drive down nontradable prices—even as wages continue to rise.

Suggested Citation

  • Frish, Roni, 2025. "How a 50 percent decline in the cost of innovative capital reshapes labor share and prices," Economic Modelling, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002457
    DOI: 10.1016/j.econmod.2025.107250
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