Balancing Workshare and Profitability within the Modern Universal Growth Theory (MUGT) Framework

This paper examines the dynamic behavior of the capital-labor-mix parameter α in CES production functions within the framework of the Modern Universal Growth Theory (MUGT). While traditional growth models don’t show openly the dynamic behavior of α, we show that under marginal profit optimization, α has to adapt continuously to remain on a balanced growth path (BGP). This adjustment leads to a redefinition of α at each basepoint—denoted αₘ—highlighting its role as a stabilizing variable. In practice, αₘ appears remarkably stable, suggesting the presence of market or institutional mechanisms that counterbalance the change of the capital-labor-mix α by technical progress. Growth, without counterbalance of the capital-labor-mix α and with elasticity of substitution σ≠1, always leads in the long run to a labor-only or capital-only production function. We further explore whether policy should focus on stabilizing workshare ws or on maintaining profitability r.