Capital-Labor Substitution, Structural Change and Growth

Arbeitspapier

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 sectoral allocation of resources, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played 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, as special cases, 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 8940

Classification and Topics

• Classification: Wirtschaft ; Economic Growth and Aggregate Productivity: General ; One, Two, and Multisector Growth Models ; Innovation; Research and Development; Technological Change; Intellectual Property Rights: General
• Subject: capital-labor substitution ; balanced growth ; structural change

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Alvarez-Cuadrado, Francisco ; Long, Ngo Van ; Poschke, Markus
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/110160
• Last update: 10.03.2025, 11:42 AM CET