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The Race Between Preferences and Technology

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  • Joachim Hubmer

    (Yale University)

Abstract

This paper argues that a unified analysis of consumption and production is required to understand the long-run behavior of the labor share of income in the United States. First, using household data on the universe of consumer spending, I document that higher-income households spend relatively more on labor-intensive goods and services as a share of their total consumption. Interpreted as the result of non-homothetic preferences, this fact implies that economic growth increases the labor share through an income effect. Second, using disaggregated good-level data on factor shares and capital intensities, I estimate that capital and labor are gross substitutes. Consequently, investment-specific technical change, manifesting itself in the form of a well- documented decline in the relative price of equipment capital, reduces the labor share. Given the estimated elasticities, I show that a parsimonious neoclassical model quantitatively matches the observed low-frequency movement in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter. Until the early 1980s, the income effect, working through non-homothetic preferences, offset capital-labor substitution. Subsequently, accelerating investment-specific technical change, leading to increasing substitution of capital for labor, began to dominate the income effect.

Suggested Citation

  • Joachim Hubmer, 2019. "The Race Between Preferences and Technology," 2019 Meeting Papers 1430, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1430
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    File URL: https://economicdynamics.org/meetpapers/2019/paper_1430.pdf
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    References listed on IDEAS

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    1. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    2. Comin, Diego & Lashkari, Danial & Mestieri, Martí, 2015. "Structural Change with Long-run Income and Price Effects," CEPR Discussion Papers 10846, C.E.P.R. Discussion Papers.
    3. Maya Eden & Paul Gaggl, 2018. "On the Welfare Implications of Automation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 15-43, July.
    4. Koh, Dongya; Santaeulàlia-Llopis, Raül; Zheng, Yu, 2015. "Labor share decline and intellectual property products capital," Economics Working Papers ECO2015/05, European University Institute.
    5. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June.
    6. Timo Boppart, 2014. "Structural Change and the Kaldor Facts in a Growth Model With Relative Price Effects and Non‐Gorman Preferences," Econometrica, Econometric Society, vol. 82, pages 2167-2196, November.
    7. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, April.
    8. Paul Goldsmith-Pinkham & Isaac Sorkin & Henry Swift, 2018. "Bartik Instruments: What, When, Why, and How," NBER Working Papers 24408, National Bureau of Economic Research, Inc.
    9. Kirill Borusyak & Xavier Jaravel, 2018. "The Distributional Effects of Trade: Theory and Evidence from the United States," 2018 Meeting Papers 284, Society for Economic Dynamics.
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    Cited by:

    1. Daron Acemoglu & Pascual Restrepo, 2019. "Automation and New Tasks: How Technology Displaces and Reinstates Labor," Journal of Economic Perspectives, American Economic Association, vol. 33(2), pages 3-30, Spring.

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