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Labor-Augmenting Technical Change and the Labor Share: New Microeconomic Foundations

Author

Listed:
  • Daniele Tavani

    (Department of Economics, Colorado State University)

  • Luca Zamparelli

    (Department of Economics and Law, Sapienza University of Rome)

Abstract

An important question in alternative economic theories has to do with the relationship between the functional income distribution and the growth rate of labor productivity. According to both the induced innovation hypothesis and Marx-biased technical change, labor productivity growth should be an increasing function of the labor share. In this paper, we first discuss the shortcomings of both theories and then provide a novel microeconomic foundation for a direct relationship between the labor share and labor productivity growth. The result arises because of profit-seeking behavior by capitalist firms that face a trade-off between investing in new capital stock and innovating to save on labor costs. Embedding this finding in the Goodwin (1967) growth cycle model, we show that: i) the resulting steady state is locally stable; ii) unlike in the original Goodwin model, the long-run employment rate is sensitive to investment decisions; finally, iii) we numerically identify parametric configurations that establish whether convergence to the long-run growth path is cyclical or monotonic.

Suggested Citation

  • Daniele Tavani & Luca Zamparelli, 2020. "Labor-Augmenting Technical Change and the Labor Share: New Microeconomic Foundations," Working Papers 2/20, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:2/20
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    File URL: http://www.diss.uniroma1.it/sites/default/files/allegati/DiSSE_Tavani_Zamparelli_wp2_2020.pdf
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    Cited by:

    1. Jose Barrales-Ruiz, Ivan Mendieta-Muñoz, Codrina Rada, Daniele Tavani, Rudiger von Arnim, 2020. "The distributive cycle: Evidence and current debates," Working Paper Series, Department of Economics, University of Utah 2020_07, University of Utah, Department of Economics.
    2. Jose Barrales‐Ruiz & Ivan Mendieta‐Muñoz & Codrina Rada & Daniele Tavani & Rudiger von Arnim, 2022. "The distributive cycle: Evidence and current debates," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 468-503, April.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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