Balancing Workshare and Profitability within the Modern Universal Growth Theory (MUGT) Framework

de la Fonteijne, Marcel R. (2025): Balancing Workshare and Profitability within the Modern Universal Growth Theory (MUGT) Framework.

Abstract

This paper examines the dynamic behavior of the capital-labor-mix parameter α in CES production functions within the framework of the Modern Universal Growth Theory (MUGT). While traditional growth models don’t show openly the dynamic behavior of α, we show that under marginal profit optimization, α has to adapt continuously to remain on a balanced growth path (BGP). This adjustment leads to a redefinition of α at each basepoint—denoted αₘ—highlighting its role as a stabilizing variable. In practice, αₘ appears remarkably stable, suggesting the presence of market or institutional mechanisms that counterbalance the change of the capital-labor-mix α by technical progress.

Growth, without counterbalance of the capital-labor-mix α and with elasticity of substitution σ≠1, always leads in the long run to a labor-only or capital-only production function.

We further explore whether policy should focus on stabilizing workshare ws or on maintaining profitability r.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital and Labor Augmented Technical Progress; Growth Model, Maximum Profit Condition; Production Functions; General Technical Progress; Capital-Labor-mix; Elasticity of Substitution; DSGE; Total Factor Productivity; TFP; Solow model; Hicks; Harrod; MUGT; Modern Universal Growth Theory
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution

References

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De la Fonteijne, Marcel R., 2018, Why the Concept of Hicks, Harrod, Solow Neutral and even Non-Neutral Augmented Technical Progress is flawed, MPRA, https://mpra.ub.uni-muenchen.de/107730/

De la Fonteijne, Marcel R., 2023, The Consequence of the Modern Universal Growth Theory (MUGT) with respect to homogeneous degree 1 CES functions, DLF Macro Economic Research, https://mpra.ub.uni-muenchen.de/118888/

De la Fonteijne, Marcel R., 2024, The inconsistency if the production function is a homogeneous degree ν CES function, solving the problem and the presentation of the Modern Universal Growth Theory, DLF Macro Economic Research, https://mpra.ub.uni-muenchen.de/121867/

De la Fonteijne, Marcel R., 2025a, The Modern Universal Growth Theory (MUGT): A comprehensive upgrade to Solow, DLF Macro Economic Research, https://mpra.ub.uni-muenchen.de/ 125134/

De la Fonteijne, Marcel R., 2025b, The Hidden Adjustment: Re-examining the Capital-Labor-Mix α in the Harrod-neutral Growth Model, DLF Macro Economic Research, https://mpra.ub.uni-muenchen.de/125332/

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