Inequality and Production Elasticity

Goren, Amir (2017): Inequality and Production Elasticity.

Abstract

We address a contention regarding capital deepening when the labor share of income declines and the elasticity of substitution is above unity between Karabarbounis and Neiman (2013) and Elsby et. al (2013). We demonstrate the incentive for technical change, which increases inequality and how investments in new technology create temporal misalignment between a decrease in the labor share of income and capital deepening. We show how the decline in the saving rate that occurred during the 80's and 90's may resolve the contention regarding capital deepening. We find that elasticity of substitution below unity is less consistent with the decline in the labor share of income. A second contention is whether the elasticity of substitution is above or below unity. We perform a time-varying state-space estimation of the evolution of elasticity using the unadjusted marginal product of labor and the Kalman Filter. We find that the elasticity between capital and labor has been fluctuating slightly above unity since 1980, which is consistent with our theoretical findings. We note that an elasticity of substitution above unity has important implications for balanced growth under capital augmentation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inequality, Technical Change, Elasticity of Substitution, Labor Share
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy

References

[1] A Guide to Statistics on Historical Trends in Income Inequality | Center on Budget and Policy Priorities, 2015.

[2] Daron Acemoglu. Labor- and Capital-Augmenting Technical Change. Journal of the European Economic Association, March 2003.

[3] Pol Antras. Is the US aggregate production function Cobb-Douglas? New estimates of the elasticity of substitution. Contributions in Macroeconomics, 2004.

[4] David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen. Concentrating on the Fall of the Labor Share. Working Paper 23108, National Bureau of Economic Research, January 2017.

[5] Ernst R. Berndt. Reconciling Alternative Estimates of the Elasticity of Substitution. The Review of Economics and Statistics, 1976.

[6] Board of Governors of the Federal Reserve System and Musa Orak. Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income. International Finance Discussion Paper, March 2017.

[7] Robert S. Chirinko. The long and short of it, Journal of Macroeconomics, 2008.

[8] Michael WL Elsby, Bart Hobijn, and Aysegül Sahin. The decline of the US labor share. Brookings Papers on Economic Activity, 2013.

[9] Gene M. Grossman, Elhanan Helpman, Ezra Oberfield, and Thomas Sampson. Balanced Growth Despite Uzawa. American Economic Review, April 2017.

[10] James Hamilton. Time Series Analysis. Princeton University Press, 1994.

[11] Loukas Karabarbounis and Brent Neiman. The Global Decline of the Labor Share. Working Paper 19136, National Bureau of Economic Research, June 2013.

[12] Dongya Koh, Raül Santaeulàlia-Llopis, and Yu Zheng. Labor Share Decline and Intellectual Property Products Capital. Social Science Research Network, Rochester, NY, January 2016.

[13] Robert Z. Lawrence. Recent Declines in Labor’s share in US Income: a preliminary neoclassical account. Technical report, National Bureau of Economic Research, 2015.

[14] Joan O’Connell. The Two/One Class Model of Economic Growth. Oxford Economic Papers, 1995.

[15] David Ricardo. Principles of Political Economy and Taxation. G. Bell and sons, 1891.

[16] Paul Romer. Endogenous Technological Change. Working Paper 3210, National Bureau of Economic Research, December 1989.

[17] Joseph A. Schumpeter. Capitalism, Socialism and Democracy. Routledge, May 2013.

[18] U.S. Bureau of Economic Analysis. Gross Domestic Product, January 1929.

[19] U.S. Bureau of Economic Analysis. Compensation of Employees: Wages and Salary Accruals, January 1946.

[20] U.S. Bureau of Economic Analysis. Hours worked by full-time and part time employees, January 1948.

[21] Hirofumi Uzawa. Optimum Technical Change in An Aggregative Model of Economic Growth. International Economic Review, January 1965.