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The Price of Capital, Factor Substitutability and Corporate Profits

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Abstract

Technical progress has contributed to a steady decline in the relative price of new capital goods and at the same time facilitated the substitutability between phys- ical capital and labor in output production. This paper studies the quantitative implications that these two changes have for the level and the variability of firms' prots, the capital-to-labor ratio, and also for labor market outcomes when profits arise from rents paid to quasi-fixed factors of production. We embed a CES pro- duction function into a model of capital accumulation and competitive search in the labor market, allowing firms to increase their size by hiring multiple workers. We use our model to disentangle the effects of the decline in the relative price of capital and increased factor substitutability. Our analysis identies each of these two changes as important drivers of the empirically observed rise in the capital- to-labor ratio and in the level and variability of firms' prots. Their overall effect on wages, employment, and the labor share of income is inconclusive, since their respective impact on each of these variables goes in the opposite direction.

Suggested Citation

  • Philipp Hergovich & Monika Merz, 2018. "The Price of Capital, Factor Substitutability and Corporate Profits," Vienna Economics Papers 1801, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:1801
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    File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie1801.pdf
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    References listed on IDEAS

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    1. Christopher Huckfeldt & Antonella Trigari & Mark Gertler, 2015. "Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires," 2015 Meeting Papers 438, Society for Economic Dynamics.
    2. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    3. Melanie Arntz & Terry Gregory & Ulrich Zierahn, 2016. "The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis," OECD Social, Employment and Migration Working Papers 189, OECD Publishing.
    4. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    5. William B. Hawkins, 2013. "Competitive Search, Efficiency, And Multiworker Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 219-251, February.
    6. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    7. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
    8. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    9. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
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    Cited by:

    1. Richiardi, Matteo G. & Valenzuela, Luis, 2019. "Firm Heterogeneity and the Aggregate Labour Share," MPRA Paper 94561, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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