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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2018 > (Research Paper) The Labor Share, Capital-Labor Substitution, and Factor Augmenting Technologies
November 29, 2018
In this paper, we analyze the dynamics of the labor share in the United States and Japan using a dynamic stochastic general equilibrium (DSGE) model. For this purpose, we develop a model employing a constant elasticity of substitution (CES) production function with capital- and labor- augmenting technologies and investment specific technology. Our findings are as follows. First, comparing two different specifications of our model - one with a CES production function and one with a Cobb-Douglas production function - using marginal data densities indicates that the former provides a better fit for both the U.S. and Japanese data. Second, our estimates suggest that the elasticity of substitution is larger than one in the United States but less than one in Japan. Third, while capital-augmenting technology shocks have contributed to the decline of the labor share in the United States, they have exerted upward pressure on the labor share in Japan. The difference in the effects of capital-augmenting technology shocks on the labor share is due to the difference in the elasticity of substitution in the United States and Japan. Finally, the estimated models for the United States and Japan successfully replicate the observed relationship between the labor share and inflation.
Labor Share, Elasticity of Capital-Labor Substitution, Inflation
We thank Kosuke Aoki, Parantap Basu, Cristiano Cantore, Andrea Ferrero, Hibiki Ichiue, Debdulal Mallick, Ryo Kato, Takushi Kurozumi, Tatsuyoshi Okimoto, Toshitaka Sekine, Nao Sudo, Tomohiro Sugo, Kenichi Ueda, Kozo Ueda, Francesco Zanetti, and participants of the Summer Workshop on Economic Theory at Hokkaido University and of a workshop at the Asian Development Bank Institute for valuable comments. Any remaining errors are the sole responsibility of the authors. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.
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