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

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 wage 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 wage 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 the resulting steady state is locally stable. We also numerically evaluate the persistence (or lack thereof) of growth cycles for varying elasticities of innovation to R&D spending and investment rates.