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Capital-Labor Substitution, Structural Change and Growth

  • Francisco Alvarez-Cuadrado


    (Department of Economics, McGill University, Montreal H3A 2T7, Canada)

  • Ngo Van Long


    (Department of Economics, McGill University, Montreal H3A 2T7, Canada)

There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supplyside factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supplyside mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism.

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Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 01.

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Length: 53 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:dpc:wpaper:0112
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