Capital-Labor Substitution, Structural Change and Growth

Francisco Alvarez-Cuadrado (), Ngo Long and Markus Poschke

No 8940, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the sectoral allocation of resources, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in initial approaches, recent models stress the role of supply-side factors in this process of structural change, in particular sector-specific technical change and sectoral differences in factor proportions. We explore a general framework that features an additional supply-side mechanism and also encompasses, as special cases, these two known mechanisms. Our model shows that sectoral differences in the degree of capital-labor substitutability – a new mechanism – are a driving force for structural change. When the flexibility to combine capital and labor differs across sectors, a factor rebalancing effect is operative. It tends to make production in the more flexible sector more intensive in the input that becomes more abundant. As a result, growth rates of sectoral capital-labor ratios can differ and, if this effect dominates, shares of each factor used in a given sector can move in different directions. We identify conditions under which this occurs and analyze the dynamics of such a case. We also provide some suggestive evidence consistent with this new mechanism.

Keywords: balanced growth; capital-labor substitution; structural change (search for similar items in EconPapers)
JEL-codes: O30 O40 O41 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2015-03
New Economics Papers: this item is included in nep-gro and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published - published in: Theoretical Economics, 2017, 12 (3), 1229-1266

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Related works:
Journal Article: Capital-labor substitution, structural change and growth (2017)
Working Paper: Capital-Labor Substitution, Structural Change and Growth (2016)
Working Paper: Capital-Labor Substitution, Structural Change and Growth (2012)
Working Paper: Capital-Labor Substitution, Structural Change and Growth (2011)
Working Paper: Capital-Labor Substitution, Structural Change and Growth (2011)
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