Abstract
The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM). We assess the quantitative importance of this discrepancy by comparing alternative calibration approaches featuring constant and declining labor shares. We find little difference in model performance. Our results derive from strong general equilibrium effects: while a declining labor share mechanically lowers wage growth, the investment response pushes wages back up. Hence, different models deliver nearly identical paths of macro aggregates. Numerous robustness checks (including a CES production function, different time periods, and calculations of the labor share) reinforce the similarity of performance across model specifications. We conclude that the NGM with a constant labor share is still an appropriate choice to study many standard macro aggregates.
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.
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