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The Neoclassical Growth Model and the Labor Share Decline

Zachary Mahone (), Joaquín Naval Navarro and Pau Pujolas ()

Department of Economics Working Papers from McMaster University

Abstract: The neoclassical growth model (NGM), which is widely used to study macroeconomic phenomena, has a constant labor share built in. However, several recent studies show that the labor share has been declining since at least the 1980s. This calls into question whether the NGM should still be used as a primary ingredient of macroeconomic models. We answer the question comparing the accuracy of the NGM's predictions on macroeconomic variables with versions of the model where the parameter governing the labor share declines. Employing the Akaike and Bayesian Information Criteria, we find that the NGM with a constant parameter is preferred. A battery of robustness checks does not alter our conclusion.

Keywords: Neoclassical Growth Model; Labor Share; AIC; BIC. (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-03
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Handle: RePEc:mcm:deptwp:2018-07