The conventional wage share vs. full employment: implications for the development of growth theory

Abstract

Traditionally, classical theorists assume a constant conventional share of wages in gross output. This assumption, together with fixed proportions, creates endogenous growth via an 'AK' style model. Pasinetti explored this model when the wage is allowed to adjust to ensure full employment. We use cointegration analysis to explore the empirical tractability of each specification. Full employment suggests productivity growth and per capita growth should be cointegrated. In the alternative, no relationship exists because per capita growth is driven by the growth rate of capital, while labour productivity follows its own path. This suggests a simple test of each specification. Consequences for future development of the classical approach are explored.