IDEAS home Printed from https://ideas.repec.org/a/bpj/bejmac/v14y2014i1p27n14.html
   My bibliography  Save this article

Real factor prices and factor-augmenting technical change

Author

Listed:
  • 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 661-687, January.
    • Handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:27:n:14
    DOI: 10.1515/bejm-2013-0108
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejm-2013-0108
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/bejm-2013-0108?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. H. Uzawa, 1971. "On a Two-Sector Model of Economic Growth," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 3, pages 19-26, Palgrave Macmillan.
    2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    3. Daron Acemoglu, 2010. "When Does Labor Scarcity Encourage Innovation?," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1037-1078.
    4. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
    6. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andreas Irmen, 2020. "Tasks, technology, and factor prices in the neoclassical production sector," Journal of Economics, Springer, vol. 131(2), pages 101-121, October.
    2. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ezra Oberfield & Devesh Raval, 2021. "Micro Data and Macro Technology," Econometrica, Econometric Society, vol. 89(2), pages 703-732, March.
    2. Gregory Casey & Ryo Horii, 2019. "A Multi-factor Uzawa Growth Theorem and Endogenous Capital-Augmenting Technological Change," ISER Discussion Paper 1051, Institute of Social and Economic Research, Osaka University.
    3. Trenczek, Jan & Wacker, Konstantin M., 2023. "Human Capital Misallocation and Output per Worker Differences: Beyond Cobb-Douglas," GLO Discussion Paper Series 1331, Global Labor Organization (GLO).
    4. de la Fonteijne, Marcel R., 2018. "Why the concept of Hicks, Harrod, Solow neutral and even non-neutral augmented technical progress is flawed in principle in any economic model," MPRA Paper 107730, University Library of Munich, Germany.
    5. Jan Trenczek & Konstantin M. Wacker, 2023. "Accounting for cross-country output differences: A sectoral CES perspective," Working Papers 2023.09, International Network for Economic Research - INFER.
    6. Takuma Kunieda & Akihisa Shibata, 2024. "Insurance against Aggregate Shocks," ISER Discussion Paper 1239, Institute of Social and Economic Research, Osaka University.
    7. Havranek, Tomas & Irsova, Zuzana & Gechert, Sebastian & Kolcunova, Dominika, 2019. "Death to the Cobb-Douglas Production Function? A Meta-Analysis of the Capital-Labor Substitution Elasticity," MetaArXiv 6um5g, Center for Open Science.
    8. Ma, Chunbo & Stern, David I., 2016. "Long-run estimates of interfuel and interfactor elasticities," Resource and Energy Economics, Elsevier, vol. 46(C), pages 114-130.
    9. Ostry, Jonathan D. & Espinoza, Raphael & Papageorgiou, Chris, 2019. "The Armistice of the Sexes: Gender Complementarities in the Production Function," CEPR Discussion Papers 13792, C.E.P.R. Discussion Papers.
    10. Bertinelli, Luisito & Cardi, Olivier & Restout, Romain, 2022. "Labor market effects of technology shocks biased toward the traded sector," Journal of International Economics, Elsevier, vol. 138(C).
    11. Leonid Kogan & Dimitris Papanikolaou & Amit Seru & Noah Stoffman, 2017. "Technological Innovation, Resource Allocation, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 665-712.
    12. Bjarne S. Jensen & Martin Richter, 2008. "Stochastic One-Sector and Two-Sector Growth Models in Continuous Time," DEGIT Conference Papers c013_035, DEGIT, Dynamics, Economic Growth, and International Trade.
    13. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    14. Cardi, Olivier & Restout, Romain, 2023. "Sectoral fiscal multipliers and technology in open economy," Journal of International Economics, Elsevier, vol. 144(C).
    15. Ezra Oberfield & Devesh Raval, 2012. "Micro Data and the Macro Elasticity of Substitution," Working Papers 12-05, Center for Economic Studies, U.S. Census Bureau.
    16. Wei-Bin Zhang, 2017. "Discrimination and Inequality in an Integrated Walrasian-General-Equilibrium and Neoclassical-Growth Theory," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 5(1), pages 57-76, March.
    17. Berthold Herrendorf & Christopher Herrington & Ákos Valentinyi, 2015. "Sectoral Technology and Structural Transformation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 104-133, October.
    18. Marco Di Pietro & Enrico Saltari, 2018. "Economic Fluctuations in the U.S. and Euro Area: Quantifying the Contribution of Technical Change," Southern Economic Journal, John Wiley & Sons, vol. 85(1), pages 203-216, July.
    19. Zha, Donglan & Kavuri, Anil Savio & Si, Songjian, 2018. "Energy-biased technical change in the Chinese industrial sector with CES production functions," Energy, Elsevier, vol. 148(C), pages 896-903.
    20. Gerald Daniels & Venoo Kakar, 2017. "Economic Growth and the CES Production Function with Human Capital," Economics Bulletin, AccessEcon, vol. 37(2), pages 930-951.

    More about this item

    Keywords

    CES production function; exogenous technical change; factor prices; neoclassical production sector;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:27:n:14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.