Predation, Labor Share and Development

This paper proposes a new mechanism based on the allocation of labor to help understand why differences among countries have remained stable. We formulate a neoclassical growth model in which agents devote time either to produce or to commit predation. Labor share is the key variable which determines in equilibrium the time devoted to each activity: an increase in the labor share raises the incentive to devote time to production and discourages predation. When the elasticity of substitution between labor and capital is lower than one, the labor share rises throughout the transition while the per capita capital is lower than the steady state level. This increase in the labor share reduces the incentive to predate and increases the incentive to work for production. Empirical evidence supports these results: low per capita income countries have larger portions of predation and present lower labor shares. The standard effects of an increase in the productivity are amplified by the indirect effects of productivity on the reallocation of labor from predation to production. Institutional improvements play a key role in reducing predation and increasing the level of per capita income.