Endogenous technical change, employment and distribution in the Goodwin model of the growth cycle

Abstract

In this paper, we introduce endogenous technological change through R&D expenditure on labor-augmenting innovation in the cyclical growth model by Goodwin (Goodwin, R. 1967. “A Growth Cycle.” In Socialism, Capitalism, and Economic Growth, edited by Carl Feinstein, Cambridge, UK: Cambridge University Press.). Innovation is a costly, forward-looking process financed out of profits, and pursued by owners of capital stock (capitalists) in order to foster labor productivity and save on labor requirements. Our main findings are: (i) Goodwin-type distributive cycles arise even with dynamic optimization, but (ii) endogenous technical change has a dampening effect on economic fluctuations; (iii) steady state per capita growth, income distribution and employment rate are endogenous, and depend on the capitalists’ discount rate, the institutional variables regulating the labor market, and policy variables such as subsidies to R&D activity. Implementing the model numerically to match long run data for the US, we show that: (iv) an increase in the capitalists’ discount rate lowers per-capita growth, the employment rate and the labor share; (v) an increase in workers’ bargaining strength moderately raises the labor share and moderately decreases per-capita growth, while sharply reducing employment: quarterly US fluctuations (1948–2006) in employment and the labor share seem to support this result; (vi) a balanced budget increase in the R&D subsidy also fosters per-capita growth at the expenses of the labor share, even though the corresponding variations might be small

Endogenous Technical Change in Alternative Theories of Growth and Distribution

“…Fourth, the Romer () model with labor as R&D input determines both growth and the labor share endogenously as increasing functions of the saving rate, similarly to classical models with costly R&D (Tavani and Zamparelli, ; Zamparelli, ). The latter contributions, however, achieve the endogeneity of factor shares even with forgone output as an input to the R&D process: key to this result is that both capital accumulation and R&D investment depend on income distribution.…”

“…In recent contributions, Tavani and Zamparelli () and Zamparelli () study the problem of resource allocation on costly R&D by capitalist firms in the classical model with exogenous labor supply. We can follow the neoclassical endogenous growth theory in assuming that the flow of new ideas depends positively on R&D inputs on the one hand, and linearly on the existing level of technology itself on the other hand.…”

“…In equilibrium, labor productivity growth depends on the saving rate both directly and indirectly through its effect on the allocation of investment and on income distribution: . Tavani and Zamparelli () obtain the values of investment in both capital stock and R&D as the solution of intertemporal optimization by forward‐looking capitalist households. The relation between saving preferences, income distribution, and growth is in principle ambiguous, but a numerical implementation of the model calibrated to match long‐run US data shows that a higher saving rate increases labor productivity growth as well as the labor share.…”

Induced Innovation, Endogenous Technical Change and Income Distribution in a Labor‐Constrained Model of Classical Growth

“…In a recent paper,Tavani and Zamparelli (2014) propose a Classical growth model with endogenous technical change where wage demands have a positive effect on the wage share. This is possible because, in their contribution, the employment rate affects the dynamic equation for R&D investment.…”

No one is alone: Strategic complementarities, capacity utilization, growth, and distribution

“…As it is customary in Classical and post-Keynesian economics, we assume that only profit-earning (capitalist) households save in order to accumulate capital stock. Slightly less common in the literature (see however Foley and Michl, 1999;Tavani and Zamparelli, 2015) is to assume that capitalist households are forward-looking in their consumption, accumulation, and utilization decisions. This assumption is made here in order to rule out any potential 'inefficiency' result implied by a limited planning horizon, or by 'rule of thumb' behavior such as saving a constant fraction of income at all times.…”