Reassessing the Role of Capital in the Dynamics of the Labor Share
Working paper Draft
Sole-authored · 2025
Abstract. The decline in the labor share since 1980 has garnered significant attention in academic literature over the past two decades. However, the investigation into the fundamental mechanism underlying this somehow recent decline overlooked the long-term stability of the labor share. This stability claims for the existence of countervailing forces, balancing the observed declined in the last forty years. I show that different capital-output elasticities across sectors can be one of those forces, using a two-sector growth model with investment-embodied technological progress. When the consumption goods sector is more sensitive to capital in production than the investment goods sector and capital per effective worker is above the steady state level, investment-embodied technological progress prompts input reallocation across sectors that can lead to a small rise in the labor share.
Keywords
Labor share · Capital-output elasticity · Two-sector growth model · Investment-embodied technical change · Structural change
Cite (BibTeX)
@unpublished{gouveiamendes2025reassessing,
author = {Gouveia-Mendes, Ricardo},
title = {Reassessing the Role of Capital in the Dynamics of
the Labor Share},
year = {2025},
note = {Working paper, ISCTE-IUL University Institute of Lisbon}
}