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Endogenous Education and Long-Run Factor Shares

Author

Listed:
  • Gene M. Grossman

    (Princeton University)

  • Elhanan Helpman

    (Harvard University)

  • Ezra Oberfield

    (Princeton University)

  • Thomas Sampson

    (London School of Economics)

Abstract
We study the determinants of factor shares in a neoclassical environment with capital skill complementarity and endogenous education. When more physical capital raises the marginal product of skills relative to that of raw labor, an increase in a broad measure of embodied human capital raises the capital share in national income for any given rental rate. When education is chosen optimally, a dynamic equilibrium is characterized by an inverse relationship between the level of human capital and both the rental rate on capital and the difference between the interest rate and the growth rate of wages. As a consequence, estimates of the elasticity of substitution that fail to account for levels of human capital will be biased upward. We develop a model with overlapping generations, ongoing increases in educational attainment, and technology-driven neoclassical growth, and show that for a class of production functions with capital-skill complementarity, a balanced growth path exists and is characterized by an inverse relationship between the rates of capital- and labor-augmenting technological progress and the capital share in national income.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2020. "Endogenous Education and Long-Run Factor Shares," Working Papers 2020-15, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-15
    as

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    File URL: https://www.princeton.edu/~grossman/Endogenous_Education_and_Factor_Shares.pdf
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    References listed on IDEAS

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    Cited by:

    1. Roya Taherifar & Mark J. Holmes & Gazi M. Hassan, 2023. "The drivers of labour share and impact on pay inequality: A firm-level investigation," Working Papers in Economics 23/03, University of Waikato.
    2. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2021. "Endogenous Education and Long-Run Factor Shares," American Economic Review: Insights, American Economic Association, vol. 3(2), pages 215-232, June.
    3. Dilip Mookherjee & Debraj Ray, 2022. "Growth, Automation and the Long-Run Share of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 1-26, October.
    4. Bustos, Emil, 2023. "The Effect of Centrally Bargained Wages on Firm Growth," Working Paper Series 1456, Research Institute of Industrial Economics.
    5. Dilip Mookherjee & Debraj Ray, 2022. "Growth, Automation and the Long-Run Share of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 1-26, October.

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    More about this item

    Keywords

    neoclassical growth; balanced growth; human capital; education; technological progress; capital-skill complementarity; labor share; capital share;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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