The relative stability of aggregate labor's share constitutes one of the great macroeconomic ratios. However, changes in individual industry labor's shares are essentially statistically independent of one another, and the average values of industry labor's shares vary widely. We present a two-sector model of economic development with induced innovation that can rationalize these phenomena as well as several other empirical regularities of real economies. Specifically, the model can account for (i) manufacturing industries becoming increasingly capital-intensive over time despite (ii) an increase in the relative price and share in total output of service industries; (iii) aggregate labor's share remains within a narrow range despite (iv) individual industry labor's shares being uncorrelated with one another over time. In the long-run the model economy can attain either a neoclassical steady-state or endogenous growth, giving it the potential to account for a wide range of real world development experiences.
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
112.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:112
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