Kaldor Facts Research Articles

‘Kaldor Facts’ and the decline of Wage Share: An agent based-stock flow consistent model of induced technical change along Classical and Keynesian lines

This paper introduces the classical idea about the so-called directed and induced technical change (ITC) within a Keynesian demand-side and evolutionary endogenous growth model in order to analyse the interplay between technical change, long-run economic growth and functional income distribution. The ITC process is analysed within an Agent-Based Stock-Flow Consistent (AB-SFC) model, wherein credit-constrained heterogeneous firms choose both the intensity and the direction of innovation towards a labour- or capital-saving choice of technique. In the long-run, the model reproduces the so-called ‘Kaldor stylised facts’ (i.e. a purely labour-saving technical change process), however during the transitional phase the model shows a labour-saving/capital-using innovation pattern, as the aggregate output-capital ratio decreases until it stabilises in the long-run, and the labour share persistently decline as observed during the last decades in many advanced (and developing) economies. Within the present model, we can ascribe these results mainly to the effect exerted by the interplay between directed and biased technical change, the process of wage formation and the dynamics of aggregate demand. In order to stress the effective role of the innovation bias on the model dynamics, the baseline scenario has been compared with a ‘counterfactual’ scenario wherein ‘neutral’ technical progress is at work. The main findings are also confirmed by computing a sensitivity investigation on the key parameters shaping innovation and wage formation process.

Contribution of factor structure change to China’s economic growth: evidence from the time-varying elastic production function model

The time-varying factor share runs through the entire process of the Chinese economic miracle, unlike the ‘Kaldor Facts’ in developed countries. Following the new structural economics theory, we construct a time-varying elastic production function model that characterises the structural changes of China’s economic element, and decompose the driving force of economic growth to measure the contribution of factor structure. We found that, from 1978–2017, the average contribution of capital, labour, technological progress, and factor structure change to the GDP was 67.01%, 10.38%, 23.08%, and −0.47%, respectively. The measurement results can aptly portray the impact of policy changes in China’s unique gradual reform process, such as the economic market reforms in 1992, the global financial crisis in 2008, and the policy changes of the new economic normal in 2014. Meanwhile, the results reveal that improving factor allocation can accelerate the total factor productivity and promote high-quality development of China’s economy.

International Capital Flows and Structural Change in a Developing Open Economy

This paper studies, how allowing foreign capital flows in a developing economy will impact the inter-sector dynamics in terms of allocation of factors of production, relative output and real exchange rate. This paper introduces foreign capital flows to the theory of structural change and unbalanced economic growth (which is predominantly a closed economy framework). The theory of structural change and unbalanced economic growth takes a contrarian view to the standard growth theoretical models based on “Kaldor Facts”. This theory states that as an economy grows and accumulates capital, the sector that has more income elastic consumption and greater capital intensity grows faster than the sector which has a lower income elastic consumption and lower capital intensity. This asymmetric growth leads to unbalanced economic growth and change in relative price among the sectors. Such divergence in sector-wise growth rates is in contrary to the traditional growth theory (which is based on “Kaldor Facts”). This paper has proposed a developing open economy model having two sectors namely traded sector and non-traded sector. The traded sector has higher income elastic consumption along with higher capital intensity & productivity growth as compared to the non-traded sector. The economy has demand side imbalances in form of non-homothetic preferences. The supply side imbalances is in the form of different capital intensity along with different growth rate of productivity across sectors. We have derived the path of aggregate capital stock per unit of labor, sector-wise allocation of factors of production (capital and labor) and relative price path of non-traded to traded sector goods. The results indicate that as an economy grows and accumulates capital, the factors of production start moving out from non-traded sector to traded sector. As a result, the traded sector starts to grow faster than that of non-traded sector. Also the relative price of non-traded sector to the traded sector goods rises (real exchange rate appreciates) with capital accumulation in the economy thereby creating additional pressure on inflation. This inflationary pressure adversely affects competitiveness of domestic firms in international markets and make domestic investment less attractive. Our findings can be linked with the workings of Kalecki (1955) i.e. “The problem of financing economic development” where it states that as an economy grows the subsistence sector shrinks as compared to the income elastic sector. This causes the aggregate price levels to increase. This paper not only extends the theory of structural change and unbalanced economic growth to open economy framework but also introduces non-homothetic preferences to traditional open economy literature which is based on Dependent Economy Framework which predominantly assumes homothetic preferences.

Growth and the Kaldor Facts

We revisit the Kaldor growth facts for the United States and the United Kingdom during the postwar period. We find that while overall the original Kaldor facts continue to hold, deviations occurred along several dimensions: Instead of staying constant, the growth rates of real GDP per worker and of real capital per worker have slowed down in the United States and the United Kingdom since the 1970s, the capital-to-output ratio has increased in the United Kingdom, and the share of income paid to labor has decreased in the United States since 1990. We discuss how to calculate the Kaldor facts in multi-sector growth models and establish that a slowdown in GDP-per-worker growth naturally results from secular changes in relative prices.

Capital-labor substitution, structural change, and growth

There is growing interest in multisector models that combine aggregate balanced growth, consistent with the well known Kaldor facts, with systematic changes in the sectoral allocation of resources, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods play an important role in initial approaches, recent models stress the role of supply-side factors in this process of structural change, in particular sector-specific technical change and sectoral differences in factor proportions. We explore a general framework that features an additional supply-side mechanism and also encompasses these two known mechanisms. Our model shows that sectoral differences in the degree of capital–labor substitutability—a new mechanism—are a driving force for structural change. When the flexibility to combine capital and labor differs across sectors, a factor rebalancing effect is operative. It tends to make production in the more flexible sector more intensive in the input that becomes more abundant. As a result, growth rates of sectoral capital–labor ratios can differ and, if this effect dominates, shares of each factor used in a given sector can move in different directions. We identify conditions under which this occurs and analyze the dynamics of such a case. We also provide some suggestive evidence consistent with this new mechanism. A quantitative analysis suggests that this channel was an important contributor to structural change out of agriculture in the United States.

Capital-Labor Substitution, Structural Change and Growth

There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism. There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism.

Endowment structures, industrial dynamics, and economic growth

Motivated by four stylized facts about industry dynamics, we propose a theory of endowment-driven structural change by developing a tractable growth model with infinite industries. The aggregate economy in the model still follows the Kaldor facts, but the composition of the underlying industries changes endogenously over time. Each industry exhibits a hump-shaped life cycle: as capital reaches a certain threshold level, a new industry appears, prospers, and then declines, to be gradually replaced by a more capital-intensive industry, ad infinitum. Analytical solutions are obtained to characterize the life cycle of each industry and the perpetual structural change.

Capital-Labor Substitution, Structural Change and Growth

There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism.

Structural Change and the Kaldor Facts in a Growth Model With Relative Price Effects and Non-Gorman Preferences

U.S. data reveal three facts: (1) the share of goods in total expenditure declines at a constant rate over time, (2) the price of goods relative to services declines at a constant rate over time, and (3) poor households spend a larger fraction of their budget on goods than do rich households. I provide a macroeconomic model with non-Gorman preferences that rationalizes these facts, along with the aggregate Kaldor facts. The model is parsimonious and admits an analytical solution. Its functional form allows a decomposition of U.S. structural change into an income and substitution effect. Estimates from micro data show each of these effects to be of roughly equal importance.

Structural Change and the Kaldor Facts in a Growth Model with Relative Price Effects and Non-Gorman Preferences

Growth of per-capita income is associated with (i) significant shifts in the sectoral economic structure, (ii) systematic changes in relative prices and (iii) the Kaldor facts. Moreover, (iv) cross-sectional data shows systematic expenditure structure difference between rich and poor households. Ngai and Pissarides (2006) and Acemoglu and Guerrieri (2008) are consistent with observation (i)-(iii) but abstract form non-homotheticities of preferences. However, they cannot replicate the structural change between the U.S. goods and service sector quantitatively. This paper presents a growth model, which reconciles both forces of structural change - relative price and income effects - with balanced growth on the aggregate. The theory is simple and parsimonious and contains an analytical solution. The model can replicate shape and magnitude of the nonbalanced sectoral facts as well as the balanced nature of growth on the aggregate. In a structural estimation, the model’s functional form is exploited to obtain estimates for the relative importance of income and price effects as determinants of the structural change.

Formal education and public knowledge

In this paper, I examine the transitional dynamics of an economy populated by individuals who split their time between acquiring a formal education, producing final goods, and innovating. The paper has two objectives: (i) uncovering the macroeconomic circumstances that favored the rise of formal education; (ii) to reconcile the remarkable growth of the education sector with the constancy of other key macroeconomic variables, such as the interest rate, the consumption–output ratio, and the growth rate of per capita income (Kaldor facts). The transitional dynamics of human capital growth models, such as Lucas (1998), would attribute the arrival of education to the diminishing marginal productivity of physical capital. Conversely, the model proposed here suggests that it is the rate of learning that catches up with the rate of return on physical capital. As technical knowledge expands, the rate of return on education increases, inducing individuals to stay longer in school. The model's transitional paths are matched with long run U.S. educational and economic data.

The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital

In 1961, Nicholas Kaldor highlighted six “stylized” facts to summarize the patterns that economists had discovered in national income accounts and to shape the growth models being developed to explain them. Redoing this exercise today shows just how much progress we have made. In contrast to Kaldor's facts, which revolved around a single state variable, physical capital, our updated facts force consideration of four far more interesting variables: ideas, institutions, population, and human capital. Dynamic models have uncovered subtle interactions among these variables, generating important insights about such big questions as: Why has growth accelerated? Why are there gains from trade? (JEL D01, E01, E22, E23, E24, J11)

Structural change, Engel's consumption cycles and Kaldor's facts of economic growth

Non-linear Engel-curves for consumer goods cause continuous structural change. Goods are sequentially introduced starting out as a luxury with high income elasticity and ending up as a necessity with low income elasticity. Although this leads to rising and falling sectoral employment shares, the model exhibits a steady growth path along which the Kaldor facts are satisfied. Extending the basic model to the case of endogenous product innovations shows that complementarities between aggregate and sectoral growth may give rise to multiple equilibria.

Capital Deepening and Non-Balanced Economic Growth

This paper constructs a model of economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share, but simultaneously induces a reallocation of capital and labor away from that sector. We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb-Douglas production functions in each sector. In this class of models, growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. We also show that for realistic parameter values, the model generates dynamics that are broadly consistent with US data. In particular, the model generates more rapid growth of employment in less capital-intensive sectors, more rapid growth of real output in more capital-intensive sectors and aggregate behavior in line with the Kaldor facts. Finally, we construct and analyze a model of non-balanced endogenous growth, which extends the main results of the paper to an economy with endogenous anddirected technical change. This model shows that equilibrium will typically involve endogenous technological progress.

Capital Deepening and Nonbalanced Economic Growth

We present a model of nonbalanced growth based on differences in factor proportions and capital deepening. Capital deepening increases the relative output of the more capital‐intensive sector but simultaneously induces a reallocation of capital and labor away from that sector. Using a two‐sector general equilibrium model, we show that nonbalanced growth is consistent with an asymptotic equilibrium with a constant interest rate and capital share in national income. For plausible parameter values, the model generates dynamics consistent with U.S. data, in particular, faster growth of employment and slower growth of output in less capital‐intensive sectors, and aggregate behavior consistent with the Kaldor facts.

Structural Change and the Kaldor Facts of Economic Growth

We present a model in which two of the most important features of the long-run growth process are reconciled: the massive changes in the structure of production and employment; and the Kaldor facts of economic growth. We assume that households expand their consumption along a hierarchy of needs and firms continuously introduce new products. In equilibrium industries with an expanding and those with a declining employment share co-exist, and each such industry goes (or has already gone) through a cycle of take-off, maturity, and stagnation. Nonetheless macroeconomic aggregates grow pari passu at a constant rate.

Beyond Balanced Growth

Balanced growth models are commonly used in macroeconomics because they are consistent with the well-known Kaldor facts regarding economic growth. These models, however, are inconsistent with one of the most striking regularities of the growth process-the massive reallocation of labour from agriculture into manufacturing and services. This paper presents a simple model consistent with both the Kaldor facts and the dynamics of sectoral labour reallocation.

Beyond Balanced Growth

Balanced growth models are commonly used in macroeconomics because they are consistent with the well-known Kaldor facts regarding economic growth. These models, however, are inconsistent with one of the most striking regularities of the growth process—the massive reallocation of labor from agriculture into manufacturing and services. This paper presents a simple model consistent with both the Kaldor facts and the dynamics of sectoral labor reallocation. The model shows that balanced growth can be consistent with structural change.