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

Author

Listed:
  • Alvarez-Cuadrado, Francisco

    () (McGill University)

  • Long, Ngo Van

    () (McGill University)

  • Poschke, Markus

    () (McGill University)

Abstract

Recent work has documented declines in the labor income share in the United States and beyond. This paper documents that these trends differ between manufacturing and services 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. We calibrate the model exploiting additional information on the pace of structural change from manufacturing to services, on which the model also has predictions. We then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature. This exercise reveals that differences in productivity growth across sectors, combined with differences in substitution possibilities, have been the main driver of both changes in the labor income share and structural change.

Suggested Citation

  • Alvarez-Cuadrado, Francisco & Long, Ngo Van & Poschke, Markus, 2015. "Capital-Labor Substitution, Structural Change and the Labor Income Share," IZA Discussion Papers 8941, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8941
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    1. repec:eso:journl:v:48:y:2017:i:3:p:231-251 is not listed on IDEAS
    2. repec:ebl:ecbull:eb-17-00103 is not listed on IDEAS
    3. Matthias Kehrig & Nicolas Vincent, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," CESifo Working Paper Series 6454, CESifo Group Munich.
    4. Tomasz Swiecki, 2017. "Determinants of Structural Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 95-131, March.
    5. Daan Steenkamp, 2016. "Factor substitution and productivity in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2016/12, Reserve Bank of New Zealand.
    6. 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.
    7. 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.

    More about this item

    Keywords

    structural change; labor income share; capital-labor substitution;

    JEL classification:

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

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