Technological Change and the Distribution of Income

Abstract

PERHAPS A MAJOR OBSTACLE to an understanding of the forces affecting the distribution of income is that much of the theory bearing on the problem has not been susceptible to rigorous tests, at least not to the satisfaction of many students. Some forces which are not adequately quantified are crucial, such as nonneutral technological change, the elasticity of substitution, and the degree of monopoly in products and factor markets. The role of the first two of these forces in determining the distribution of income between, say, capital and labor has been spelled out theoretically in the early 1930's by J. R. Hicks.' As is well known, there are two propositions in the neoclassical tradition which hold that relative shares are the resultant of configurations of nonneutral technological change, the elasticity of substitution, and the labor-capital ratio. The first holds that a factor saving innovation, cet. par., reduces the relative share of income of that factor in all cases.2 The second maintains that if one factor increases in supply more rapidly than another, and if the elasticity of substitution a is less than unity, the relative share of the first factor decreases.3 Of course, if a exceeds unity, the relative share of the first factor increases; and if a is equal to unity (the Cobb-Douglas case), changes in the relative supplies of factors will have no effect on the relative shares. We add a third proposition: An increase in the elasticity of substitution (due, say, to a onneutral technological change) reduces the relative -'hare of labor provided labor is scarce. This proposition is developed below for an im-portant class of production functions. For * Manuscript received March 1, 1962, revised November 7, 1962. The Theory of Wages, (London: Macmillan and Co., Ltd., 1935). For the most part, Hicks assumed competitive markets. For a discussion of monopoly forces in the determination of relative income shares, cf. M. Kalecki, Theory of Economic Dynamics, (London: Allen and Unwin, Ltd., 1954), 28-31. Although this paper abstracts from the effects of monopoly, we hope to return to the problem at a future date. 2 Hicks, op. cit., 122. An innovation is capital using, e.g., if the marginal product of capital increases relative to the marginal product of labor for each combination of labor and capital. 3 Hicks, op. cit., 115.