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The Cyclical Behavior of Factor Shares

Michele Boldrin, Lijun Zhu and Yong Wang
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Michele Boldrin: Washington University in St Louis
Lijun Zhu: Peking University

No 1208, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We review the empirical evidence about factor shares and show that, apart from a varying trend, they are characterized by a strong and persistent cyclical behavior. We argue that existing models of the business cycles cannot replicate these facts. Next we study a model of growth and innovation under competitive conditions. Firms choose how many workers to hire, how much to invest, and which production technique to use. New productive capacity, embodying labor saving techniques, is costly. Central to our theory are endogenous movements in relative factor prices creating incentives for replacing old technologies with new ones. The endogenous interaction between labor-saving innovations and changes in the relative price of labor is the source of both growth and cycles .

Date: 2019
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