Abstract
The neoclassical growth model (NGM), which is widely used to study macroeconomic phenomena, has a constant labor share built in. However, several recent studies show that the labor share has been declining since at least the 1980s. This calls into question whether the NGM should still be used as a primary ingredient of macroeconomic models. We answer the question comparing the accuracy of the NGM's predictions on macroeconomic variables with versions of the model where the parameter governing the labor share declines. Employing the Akaike and Bayesian Information Criteria, we find that the NGM with a constant parameter is preferred. A battery of robustness checks does not alter our conclusion.
Highlights
The neoclassical growth model (NGM), a workhorse of modern macroeconomics, typically features a Cobb–Douglas production function with a constant labor share.1 Recently a stream of literature has argued that labor’s shareThis work is licensed608 | Z
The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM)
Our main finding is that the performance of the NGM with a constant labor share is similar to versions that explicitly include time-varying labor shares
Summary
The neoclassical growth model (NGM), a workhorse of modern macroeconomics, typically features a Cobb–Douglas production function with a constant labor share. Recently a stream of literature has argued that labor’s share. We simulate three versions of the model (feeding in a constant labor share, the exact evolution of the labor share, and a trend decline) and find that performance of the NGM is largely unaffected. The constant labor share assumption of the NGM is fairly innocuous, at least for paths of macro aggregates This is driven by strong equilibrium responses to the labor share decline. In the NGM laid out above, the labor share is governed by parameter α appearing in the exponents of the Cobb–Douglas production function.2 Since this is typically assumed constant across periods, the model’s labor share does not decline. Our paper provides initial model-based evidence that, even if the labor share were declining, it would not appreciably impact the paths of macro aggregates predicted by the NGM.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
