Cross-country Variation in Factor Shares and its Implications for Development Accounting
The stability of factor shares has long been considered one of the “stylized facts” of macroeconomics. However, the relationship between cross-country factor shares and economic development is dependent on how factor shares are measured. Most factor share studies acknowledge only two factors of production: total capital and total labor. The failure to acknowledge more than two factors yields misleading results. In the first part of the paper, I distinguish between reproducible and non-reproducible factors of production. I disentangle physical capital’s share from natural capital’s share and human capital’s share from unskilled labor’s share. Results reveal that non-reproducible factor shares decrease with the stage of economic development, and reproducible factor shares increase with the stage of economic development. This suggests that studies relying on the macroeconomic paradigm of constant factor shares should be revisited. Development accounting nearly always assumes the constancy of factor shares. In the second part of the paper, I perform the development accounting exercise but allow factor shares to vary and distinguish between reproducible and non-reproducible factors. My approach yields results that stand in stark contrast to those previously attained. The general consensus is that at least half of the cross-country variation in output per worker accrues to the Total Factor Productivity (TFP) residual. With my approach, the majority of variation in output per worker accrues to factor shares, specifically physical capital’s share and natural capital’s share. The explanatory power of the TFP residual decreases by more than 30 percentage points. This evidence does not, however, diminish the role of technical change. Rather, the evidence indicates the importance of acknowledging a new type of technical change, one that impacts factor shares.
|Length:||43 pages JEL Classification: E25, O30, O11|
|Date of creation:||Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +45 6550 2233
Fax: +45 6550 1090
Web page: http://degit.sam.sdu.dk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David N. Well, 2007. "Accounting for the Effect Of Health on Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1265-1306.
- Scott L. Baier & Gerald P. Dwyer & Robert Tamura, 2006.
"How Important are Capital and Total Factor Productivity for Economic Growth?,"
Western Economic Association International, vol. 44(1), pages 23-49, January.
- Scott L. Baier & Gerald P. Dwyer & Robert Tamura, 2002. "How important are capital and total factor productivity for economic growth?," FRB Atlanta Working Paper 2002-2, Federal Reserve Bank of Atlanta.
- Hernando Zuleta, 2007.
"An empirical note on factor shares,"
DOCUMENTOS DE TRABAJO
004363, UNIVERSIDAD DEL ROSARIO.
- Hernando Zuleta, 2008. "An empirical note on factor shares," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(3), pages 379-390.
- Barro, Robert J. & Lee, Jong-Wha, 1993.
"International comparisons of educational attainment,"
Journal of Monetary Economics,
Elsevier, vol. 32(3), pages 363-394, December.
- Robert J. Barro & Jong-Wha Lee, 1993. "International Comparisons of Educational Attainment," NBER Working Papers 4349, National Bureau of Economic Research, Inc.
- Gary D. Hansen & Edward C. Prescott, 1998.
"Malthus to Solow,"
NBER Working Papers
6858, National Bureau of Economic Research, Inc.
- Joseph Zeira, 2006.
"Machines as Engines of Growth,"
DEGIT Conference Papers
c011_059, DEGIT, Dynamics, Economic Growth, and International Trade.
- Jones, Larry E. & Manuelli, Rodolfo E., 1997.
"The sources of growth,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 21(1), pages 75-114, January.
- Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
- John J. Seater & Pietro Peretto, 2007.
"Factor-Eliminating Technical Change,"
2007 Meeting Papers
272, Society for Economic Dynamics.
- Psacharopoulos, George & Patrinos, Harry Anthony, 2002.
"Returns to investment in education : a further update,"
Policy Research Working Paper Series
2881, The World Bank.
- George Psacharopoulos & Harry Anthony Patrinos, 2004. "Returns to investment in education: a further update," Education Economics, Taylor & Francis Journals, vol. 12(2), pages 111-134.
- Caselli, Francesco, 2004.
"Accounting for Cross-Country Income Differences,"
CEPR Discussion Papers
4703, C.E.P.R. Discussion Papers.
- Hernando Zuleta, 2007.
"Why labor income shares seem to be constant?,"
The Journal of International Trade & Economic Development,
Taylor & Francis Journals, vol. 16(4), pages 551-557.
- Francesco Caselli, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
- Douglas Gollin, 2001.
"Getting Income Shares Right,"
Department of Economics Working Papers
2001-11, Department of Economics, Williams College.
- Hernando Zuleta, 2006.
"Factor saving innovations and factor income shares,"
DOCUMENTOS DE TRABAJO
002706, UNIVERSIDAD DEL ROSARIO.
- Hernando Zuleta, 2008. "Factor Saving Innovations and Factor Income Shares," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 836-851, October.
- Vollrath, Dietrich, 2009. "How important are dual economy effects for aggregate productivity?," Journal of Development Economics, Elsevier, vol. 88(2), pages 325-334, March.
- Galor, Oded & Weil, David, 1998.
"Population, Technology and Growth: From the Malthusian Regime to the Demographic Transition,"
CEPR Discussion Papers
1981, C.E.P.R. Discussion Papers.
- Oded Galor & David N. Weil, 1998. "Population, Technology, and Growth: From the Malthusian Regime to the Demographic Transition," Working Papers 98-1, Brown University, Department of Economics, revised 19 Aug 1998.
- Ben S. Bernanke & Refet S. Gürkaynak, 2002.
"Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously,"
in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72
National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Refet S. Gurkaynak, 2001. "Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously," NBER Working Papers 8365, National Bureau of Economic Research, Inc.
- Michael J. Boskin & Lawrence J. Lau, 2000. "Generalized Solow-Neutral Technical Progress and Postwar Economic Growth," NBER Working Papers 8023, National Bureau of Economic Research, Inc.
- Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
When requesting a correction, please mention this item's handle: RePEc:deg:conpap:c015_014. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Pedersen)
If references are entirely missing, you can add them using this form.