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The Labor Share, Capital-Labor Substitution, and Factor Augmenting Technologies

Author

Listed:
  • Naohisa Hirakata

    (Bank of Japan)

  • Yasutaka Koike

    (Bank of Japan)

Abstract

In this paper, we analyze the dynamics of the labor share in the United States and Japan using a dynamic stochastic general equilibrium (DSGE) model. For this purpose, we develop a model employing a constant elasticity of substitution (CES) production function with capital- and labor- augmenting technologies and investment specific technology. Our findings are as follows. First, comparing two different specifications of our model - one with a CES production function and one with a Cobb-Douglas production function - using marginal data densities indicates that the former provides a better fit for both the U.S. and Japanese data. Second, our estimates suggest that the elasticity of substitution is larger than one in the United States but less than one in Japan. Third, while capital-augmenting technology shocks have contributed to the decline of the labor share in the United States, they have exerted upward pressure on the labor share in Japan. The difference in the effects of capital-augmenting technology shocks on the labor share is due to the difference in the elasticity of substitution in the United States and Japan. Finally, the estimated models for the United States and Japan successfully replicate the observed relationship between the labor share and inflation.

Suggested Citation

  • Naohisa Hirakata & Yasutaka Koike, 2018. "The Labor Share, Capital-Labor Substitution, and Factor Augmenting Technologies," Bank of Japan Working Paper Series 18-E-20, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp18e20
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2018/data/wp18e20.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ergül, Özgür & Göksel, Türkmen, 2020. "The effects of technological development on the labor share of national income," Economic Modelling, Elsevier, vol. 87(C), pages 158-171.
    2. ADACHI Daisuke & SAITO Yukiko, 2020. "Multinational Production and Labor Share," Discussion papers 20012, Research Institute of Economy, Trade and Industry (RIETI).
    3. Kosuke Aoki & Yoshihiko Hogen & Kosuke Takatomi, 2023. "Price Markups and Wage Setting Behavior of Japanese Firms," Bank of Japan Working Paper Series 23-E-5, Bank of Japan.

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    More about this item

    Keywords

    Labor Share; Elasticity of Capital-Labor Substitution; Inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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