Labor-augmenting technical change and the labor share: New microeconomic foundations

By Daniele Tavani, Luca Zamparelli

PKES Working Paper 2004

February 2020

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, and 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, Employment.

JEL classification: E32 O33