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Factor Substitution Possibilities, Labor Share Dynamics, and Inequality in an Age of Intangibles

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  • Adnan Velic

    (Technological University Dublin)

Abstract

We examine the economy-wide degree of substitutability between intangible capital and other factor inputs in production using a large sample of advanced countries. In this context, we turn to studying the implications of intangible and tangible capital growth for labor income share dynamics. Compared to tangible capital, we find that intangible capital more strongly complements skilled labor. The analysis further indicates relative fungibility between tangible capital and a composite of intangible capital and skilled labor, in line with the rising prominence of knowledge-intensive tasks and AI-driven online platforms. The intrinsic nature of intangibles and their asymmetric effects across skilled and unskilled labor productivity based on our substitution elasticities suggest that intangible capital growth increases income inequality more aggressively.

Suggested Citation

  • Adnan Velic, 2023. "Factor Substitution Possibilities, Labor Share Dynamics, and Inequality in an Age of Intangibles," Trinity Economics Papers tep0723, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0723
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    More about this item

    Keywords

    factor substitution; skills; laborincomeshares; (in)tangiblecapital; incomeinequality; management; productivity; growth;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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