Endogenous Technical Change, Employment and Distribution in the Goodwin Model

The Goodwin (1967) model assigns distributional conflict a central role in the dynamics of capital accumulation, but is silent on the determinants of technical change. Follow- ing Shah and Desai (1981), previous studies focused on the effects of the direction, or bias of technical change on the growth cycle (van der Ploeg, 1987; Foley, 2003; Julius, 2005). Either implicitly of explicitly, these contributions adopted the induced innovation hypothesis by Kennedy (1964): there exists an innovation possibility frontier out of which profit-maximizing firms freely choose the optimal combination of capital– and labor–augmenting technical change, without having to allocate resources to R&D. Our fo- cus is instead on the choice of intensity of technical change, that is the share of R&D expenditure in output. In our framework, innovation is a costly, forward–looking, uncertain process financed out of profits, and pursued by owners of capital stock in order to foster labor productivity and save on labor requirements. Specifically, we highlight the role of R&D spending as an additional ‘weapon’ available to capital in the conflict over income distribution. Our main findings are: (i) similarly to the results in the literature on the direction of technical change, an endogenous intensity of R&D has the ultimate effect of dampening the distributive cycle; (ii) steady state per capita growth, income distribution and employment rate depend on the capitalists’ discount rate (which determines their propensity to save), the institutional variables regulating the labor market, and the size of subsidies to R&D activity. Implementing the model numerically, we show that: (iii) a reduction in the saving rate of capitalists discount rate lowers per–capita growth, the em- ployment rate and the labor share; (iv) an increase in workers’ bargaining power raises the labor share, while reducing employment and per–capita growth; (v) an increase in the R&D subsidy also fosters per–capita growth, at the expenses of the labor share. The vari ations corresponding to (iv) and (v), however, can be small.