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Labor-Augmenting Technical Change and the Labor Share: New Microeconomic Foundations

Daniele Tavani and Luca Zamparelli

No 2/20, Working Papers from Sapienza University of Rome, DISS

Abstract: An important question in alternative economic theories has to do with the relationship between the functional income distribution and the growth rate of labor productivity. According to both the induced innovation hypothesis and Marx-biased technical change, labor productivity growth should be an increasing function of the labor share. In this paper, we first discuss the shortcomings of both theories and then provide a novel microeconomic foundation for a direct relationship between the labor share and labor productivity growth. The result arises because of profit-seeking behavior by capitalist firms that face a trade-off between investing in new capital stock and innovating to save on labor costs. Embedding this finding in the Goodwin (1967) growth cycle model, we show that: i) the resulting steady state is locally stable; ii) unlike in the original Goodwin model, the long-run employment rate is sensitive to investment decisions; finally, iii) we numerically identify parametric configurations that establish whether convergence to the long-run growth path is cyclical or monotonic.

Keywords: Endogenous Technical Change; Income Shares; Labor Productivity; Employment (search for similar items in EconPapers)
JEL-codes: E32 O33 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-gro, nep-ino, nep-mac and nep-pke
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