Growth and Income Distribution Under Biased Technological Progress

Abstract

Instead of focusing on the case of neutral technological progress as in conventional growth models, we investigate the role of biased technological progress in economic growth and income distribution, using the neoclassical growth model. It is shown that Piketty’s (Capital in the twenty-first century. Belknap Press of Harvard University Press, Cambridge, 2014) empirical results regarding the long-run trends of the capital/income ratio and capital share of income are consistently explained by biased technological progress with the elasticity of substitution between labor and capital less than unity. The “productivity paradox” pointed out by Solow is also shown to be explained as a case of labor-saving technological progress. The conditions under which firms have incentives to introduce labor-saving (or capital-saving) technological progress are also investigated. If firms choose a technology type to increase the rate of return on capital, labor-saving (or capital-saving) technological progress is introduced when the labor share of income exceeds (or falls short of) the elasticity of substitution between labor and capital. The introduction of labor-saving (or capital-saving) technological progress lowers (or raises) the labor share of income, which as a result is adjusted towards the value of the elasticity of substitution between labor and capital.