Why labor income shares seem to be constant?
The common assumptions that labor income share does not change over time or across countries and that factor income shares are equal to the elasticity of output with respect to factors have had important implications for economic theory. However, there are several theoretical reasons for why the elasticity of output with respect to reproducible factors should be correlated with the stage of development. In particular, the behavior of international trade and capital flows and the existence of factor saving innovations imply such a correlation. If this correlation exists and if factor income shares are equal to the elasticity of output with respect to factors then the labor income share must be negatively correlated with the stage of development. The existence of a labor intensive sector that produces non-tradable goods would explain why labor income share has no correlation with income per capita.
Volume (Year): 16 (2007)
Issue (Month): 4 ()
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