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Real factor prices and factor-augmenting technical change

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  • Irmen Andreas

    (University of Luxembourg and CESifo, Munich; University of Luxembourg, Faculty of Law, Economics and Finance, 148, avenue de la Faïencerie, L-1511 Luxembourg, Luxembourg)

Abstract

How does technical change affect real factor prices? This paper gives a comprehensive answer for the most important benchmark used in the modern debate: technical change is factor-augmenting and materializes in a neoclassical economy with competitive firms equipped with a constant elasticity of substitution (CES) production function. I establish that the effect of labor-augmenting technical change crucially hinges on whether the economy’s capital endowment exceeds or falls short of its amount of efficient labor. This distinction determines the sign of the effect for sufficiently small values of the elasticity of substitution. In the former case, labor-augmenting technical progress must increase the equilibrium wage. In the latter case the equilibrium wage is reduced. In both cases, technical progress increases the price of capital. Overall, the analysis stresses that not only the elasticity of substitution but also the degree of diminishing returns, the distribution parameters of the CES, and the level of the efficient capital intensity matter for the effect of labor-augmenting technical change on real factor prices. Mutatis mutandis, these considerations carry over to the case of capital-augmenting technical change.

Suggested Citation

  • Irmen Andreas, 2014. "Real factor prices and factor-augmenting technical change," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-27, January.
    • Handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:27:n:14
    DOI: 10.1515/bejm-2013-0108
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    References listed on IDEAS

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    Cited by:

    1. Irmen Andreas, 2020. "Endogenous task-based technical change—factor scarcity and factor prices," Economics and Business Review, Sciendo, vol. 6(2), pages 81-118, June.
    2. Andreas Irmen, 2020. "Tasks, technology, and factor prices in the neoclassical production sector," Journal of Economics, Springer, vol. 131(2), pages 101-121, October.

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