Content introduction：

No. E2019010

The Cyclical Behavior of Factor Shares

Michele Boldrin, Yong Wang, Lijun Zhu

December 22, 2019

 

Abstract：

We review the empirical evidence about factor shares and show that, apart from a varying trend, they are characterized by a strong and persistent cyclical pattern. A typical expansion begins with an increase in the capital income share; this share peaks substantially earlier than output, and falls in the the last phase of expansion. Next, we provide a theory of why this may be due to the pattern of technological innovation under competition. Central to our theory are endogenous movements in relative factor prices creating incentives for replacing old technologies with new ones. Accumulation of capital increases the labor share in the short run; in the longer run, a rising labor cost incentivizes firms to innovate on labor saving technologies, the adoption of which eventually reduces the labor share. This endogenous interaction between labor-saving innovations and changes in the relative price of labor is the source of both growth and cycles.

 

Boldrin: Department of Economics, Washington University in St Louis, boldrin@wustl.edu. Wang: Institute of New Structural Economics, Peking University, yongwang@nsd.pku.edu.cn. Zhu: Institute of New Structural Economics, Peking University, lijunzhu@nsd.pku.edu.cn. For comments and suggestions, we thank conference participants at Peking University, PBCSF at Tsinghua University, the 2019 Asian Meeting of Econometric Society, 2019 China International Conference in Macroeconomics, and the 2019 SED annual meeting in St. Louis.

 

 

The series of New Structural Economics Working Papers aims to encourage academic scholars and students from all over the world to conduct academic research in the field of new structural economics. Excellent papers are selected irregularly and are offered academic suggestions and recommendation, but the published working papers are not intended to represent official communication from INSE.

The Present Paper was approved by the NSE A0 Growth Group.