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Capital Labor Substitution, Structural Change, and the Labor Income Share

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  • Francisco Alvarez-Cuadrado
  • Ngo Van Long
  • Markus Poschke

Abstract

Long run economic growth goes along with structural change. Recent work has identified explanatory factors on the demand side (non-homothetic preferences) and on the supply-side, in particular differential productivity growth across sectors and differences in factor proportions and capital deepening. This paper documents that there have also been differential trends in labor and capital income shares across sectors in the U.S., and in a broad set of other industrialized economies, and shows that a model where the degree of capital-labor substitutability differs across sectors is consistent with these trends. The interplay of differences in productivity growth and in the substitution elasticity across sectors drives both the evolution of sectoral factor income shares and the shape of structural change. We evaluate the empirical importance of this mechanism and the other mechanisms proposed in the literature in the context of the recent U.S. experience. We find that differences in productivity growth rates between manufacturing and services have been the most important driver of structural change. Yet, differences in substitution elasticities are key not only for understanding the evolution of sectoral and aggregate factor income shares, but also for the shape of structural change. Differences in capital intensity and non-homothetic preferences have hardly mattered for the manufacturing-services transition. La croissance économique de long terme entraine un changement structurel. Des travaux récents ont identifié des facteurs explicatifs du côté de la demande (préférence non homothétique) et sur le côté de l'offre, les taux de croissance inégaux de la productivité des secteurs, les différences dans les proportions de facteurs et l'approfondissement du capital. Ce papier montre qu'il y a des tendances différentielles des parts d'emploi et les revenus du capital parmi les secteurs, et montre qu'un modèle où le degré de substituabilité capital-travail diffère entre les secteurs est conforme avec ces tendances. L'interaction des différences dans la croissance de la productivité et de l'élasticité de substitution entre les secteurs entraîne à la fois l'évolution des partages sectoriels de revenus des facteurs et la forme de changement structurel. Nous évaluons l'importance empirique de ce mécanisme et les autres mécanismes proposés dans la littérature dans le contexte de l'expérience américaine récente. Nous constatons que les différences de taux de croissance de la productivité entre les secteurs ont été le facteur le plus important de changement structurel, les différences dans les élasticités de substitution sont essentielles non seulement pour comprendre l'évolution des parts de revenus des facteurs sectoriels et globaux, mais aussi pour la forme de changement structurel.

Suggested Citation

  • Francisco Alvarez-Cuadrado & Ngo Van Long & Markus Poschke, 2014. "Capital Labor Substitution, Structural Change, and the Labor Income Share," CIRANO Working Papers 2014s-02, CIRANO.
  • Handle: RePEc:cir:cirwor:2014s-02
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    References listed on IDEAS

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    2. repec:gam:jsusta:v:10:y:2018:i:11:p:3895-:d:178469 is not listed on IDEAS
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    4. Paul, Saumik, 2018. "Capital Skill Substitutability and the Labor Income Share: Identification Using the Morishima Elasticity of Substitution," ADBI Working Papers 839, Asian Development Bank Institute.
    5. Daan Steenkamp, 2018. "Factor Substitution and Productivity in New Zealand," The Economic Record, The Economic Society of Australia, vol. 94(304), pages 64-79, March.
    6. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.
    7. Dominique Guellec & Caroline Paunov, 2017. "Digital Innovation and the Distribution of Income," NBER Chapters,in: Measuring and Accounting for Innovation in the 21st Century National Bureau of Economic Research, Inc.
    8. repec:ebl:ecbull:eb-17-00103 is not listed on IDEAS
    9. Beqiraj, Elton & Fanti, Lucrezia & Zamparelli, Luca, 2018. "Structural Change and the Wage Share: a Two-Sector Kaleckian Model," MPRA Paper 89558, University Library of Munich, Germany.
    10. Nicolas Vincent & Matthias Kehrig, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," 2017 Meeting Papers 739, Society for Economic Dynamics.
    11. Geoff Weir, 2018. "Wage Growth Puzzles and Technology," RBA Research Discussion Papers rdp2018-10, Reserve Bank of Australia.

    More about this item

    Keywords

    Structural changes; Elasticity of Substitution; Changement structurelle; l'élasticité de substitution;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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