To Augment Or Not To Augment? A Conjecture On Asymmetric Technical Change

Following standard macroeconomic theory, a non-increasing long-run share of labor in income combined with a capital-labor substitution elasticity of less than unity implies that productivity growth should be labor-augmenting.... [ view full abstract ]

Following standard macroeconomic theory, a non-increasing long-run share of labor in income combined with a capital-labor substitution elasticity of less than unity implies that productivity growth should be labor-augmenting. Employing an industry decomposition for the U.S., we find that technical progress is factor neutral. However, we stress potential inflation measurement errors manifested in the form of non-positive long-term productivity growth in a number of industries. We illustrate that estimates of the bias of technical change are quite sensitive to these measurement issues. If aggregate inflation is annually overstated by as little as a third of a percentage point, technical progress is already over 50 percent higher in the labor-intensive sector than in the capital-intensive sector. Thus, even the presence of small positive inflation biases could very well mean that technical change is notably labor augmenting.