Abstract

This paper provides a microfoundation of the neoclassical growth theory. To rationalize a substantial share of labor in income despite ongoing automation of tasks, we present a simple model in which demand shifts toward goods of increasing sophistication along a vertically differentiated production structure. Automation of more advanced goods requires increasingly sophisticated capital which remains scarce along the growth path. This is why labor maintains a substantial share in income independent of core parameter assumptions. While our model features an entirely different mechanism, we show that its aggregate representation is the one of a neoclassical model with labor-augmenting technical change.

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