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

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.

The distributive cycle: Evidence and current debates

“…Although the argument above has natural appeal, it is not immune to criticism, especially because the long‐run income distribution is de facto exogenous. Tavani and Zamparelli (2020b) have focused on endogenous, purely labor‐augmenting technical change financed out of capitalist profits. The model delivers again a direct dependence of labor productivity growth on the wage share, but boils down to two equations, as the dynamic behavior of the income‐capital ratio is now absent: $$\begin{eqnarray} \dot{e} &=& e(s_\pi (1-\psi )\sigma -(a(\psi ; s_\pi )+n))\end{eqnarray}$$ $$\begin{eqnarray} \dot{\psi } &=& \psi (\rho e-(\omega _0 + a(\psi ; s_\pi ))).$$…”

“…\end{eqnarray}The steady state is described by Equation () and the implicit solution to $$\begin{equation} 1-\psi _{ss} = \frac{a(\psi _{ss}; s_\pi )+n}{s_\pi \sigma }. \end{equation}$$In this framework, Tavani and Zamparelli (2020b) thus show that the long‐run wage share is directly related to the saving rate out of profits $$s_\pi$$, which contrasts with the induced technical change model. Given that long‐run employment is wage‐led as above, an increase in the saving rate puts upward pressure on both accumulation and labor‐saving R&D spending.…”

Path dependence and stagnation in a classical growth model

“…15 Second, it is, therefore, the distribution-led component that is ultimately responsible for the endogeneity of technical progress in the long run. In fact, both models with induced bias in technical change (such as Julius, 2005 ) and models with an endogenous rate of labour productivity growth arising from capital-labour conflict (such as Tavani and Zamparelli, 2021 ) deliver some form of ‘wage-led’ results in the long run. 16…”

“… 16 Classical models with induced bias of technical change are characterised by an upward-sloping relation in levels between the employment rate and the wage share ( Foley, 2003 ; Julius, 2005 ), whereas Tavani and Zamparelli (2021) as well as Foley et al (2019 , Ch. 9) provide microeconomic foundations for a wage-led growth rate in the long run.…”

“…Our growth model is constructed around the technical progress function proposed by Taylor et al (2019) (TFR hereafter), which builds on two staples in structuralist Keynesian thinking on economic growth. On the one hand, it features endogenous technical change through a Kaldor-Verdoorn Law based on dynamic increasing returns to scale; on the other hand, it emphasises the notion that labour-saving technical change is distribution-led, either because of induced bias in technical change as in Foley (2003) ; Julius (2005) ; Zamparelli (2015) or endogenous technical progress in models of class-conflict as in Tavani and Zamparelli (2021) . 1 One of the innovative features of TFR’s technical progress hypothesis, its use of the capital-population ratio as a scale factor, lends itself to the development of a transparent growth model with path dependence in the employment rate, i.e.…”