Capital-labor substitution, structural change, and growth

Abstract

There is growing interest in multisector models that combine aggregate balanced growth, consistent with the well known Kaldor facts, with systematic changes in the sectoral allocation of resources, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods play an important role in initial approaches, recent models stress the role of supply‐side factors in this process of structural change, in particular sector‐specific technical change and sectoral differences in factor proportions. We explore a general framework that features an additional supply‐side mechanism and also encompasses these two known mechanisms. Our model shows that sectoral differences in the degree of capital–labor substitutability—a new mechanism—are a driving force for structural change. When the flexibility to combine capital and labor differs across sectors, a factor rebalancing effect is operative. It tends to make production in the more flexible sector more intensive in the input that becomes more abundant. As a result, growth rates of sectoral capital–labor ratios can differ and, if this effect dominates, shares of each factor used in a given sector can move in different directions. We identify conditions under which this occurs and analyze the dynamics of such a case. We also provide some suggestive evidence consistent with this new mechanism. A quantitative analysis suggests that this channel was an important contributor to structural change out of agriculture in the United States.

Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective

“…1 One could obtain a declining labor share by assuming an aggregate CES production function in agriculture.with a high elasticity of substitution between capital and labor, like inAlvarez-Cuadrado et al (2017). However, such alternative model would feature, counterfactually, an ever declining labor share that would converge to zero in the long run.…”

Labor mobility, structural change and economic growth

“…Note that after 1920 the value of this ratio was close to its empirical estimates and does not exhibit a trend. 4 This numerical analysis suggests that sectoral di¤erences in wages must be introduced to spell out the two features of structural change.…”

“…3 This value is obtained from Valentinyi and Herrendorf (2008) that use data for the US in the period 1990-2000. 4 Before 1920 data on relative wages are controversial as has been explained by Caselli and Colleman (2001). Therefore, measurement errors in the value of relative wages may explain the low values of the ratio between sectoral LIS before 1920. spent looking for a job in a di¤erent sector).…”

“…4 Papageorgiou and Perez-Sebastian (2005) illustrate that some fast growing economies exhibit a hump-shaped transition of the GDP growth rate.…”

Electricity Access and Structural Transformation: Evidence from Brazil's Electrification

“…The second one is the sector-biased technical change suggested by Baumol (1967) and, more recently, by Ngai and Pissarides (2007). 7 Ngai and Pissarides (2007) show that if there are two industries, one characterized by a larger TFP growth, hours of work increase in the stagnant sector if the two goods have a relatively large degree of complementarity; otherwise labor moves in the direction of the progressive sector.…”