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The Neoclassical Growth Model and the Labor Share Decline

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  • Zachary L. Mahone
  • Joaquin Naval
  • Pau S. Pujolas

Abstract

The neoclassical growth model (NGM), which is widely used to study macroeconomic phenomena, has a constant labor share built in. However, several recent studies show that the labor share has been declining since at least the 1980s. This calls into question whether the NGM should still be used as a primary ingredient of macroeconomic models. We answer the question comparing the accuracy of the NGM's predictions on macroeconomic variables with versions of the model where the parameter governing the labor share declines. Employing the Akaike and Bayesian Information Criteria, we find that the NGM with a constant parameter is preferred. A battery of robustness checks does not alter our conclusion.

Suggested Citation

  • Zachary L. Mahone & Joaquin Naval & Pau S. Pujolas, 2018. "The Neoclassical Growth Model and the Labor Share Decline," Department of Economics Working Papers 2018-07, McMaster University.
    • Handle: RePEc:mcm:deptwp:2018-07
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    References listed on IDEAS

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    1. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "The productivity slowdown and the declining labor share: a neoclassical exploration," CEP Discussion Papers dp1504, Centre for Economic Performance, LSE.
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    Keywords

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    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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