Download This PaperSolow to Becker-Lucas
39 Pages Posted: 16 Oct 2019 Last revised: 29 Jan 2025
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Solow to Becker-Lucas
Date Written: December 18, 2020
Abstract
We propose a unified growth model to explain the transition from the Solow economy (characterized by physical capital and labor) to the Becker-Lucas economy (which introduces human capital as a new accumulation factor). The capital-skill complementarity between human capital and physical capital leads to a different factor structure in the Becker-Lucas sector compared to the Solow sector. Our model demonstrates that the economy starts in the Solow framework, where the accumulation of physical capital leads to diminishing returns, making the Becker-Lucas sector profitable and triggering structural transformation. We show that, even if the total factor productivity growth rate in the Becker-Lucas sector is lower than in the Solow sector, the transition can still occur due to efficiency gains from human capital accumulation. Moreover, our theory provides a novel explanation for the decline in labor share during the transition: Human capital accumulation and the difference in factor structure between the Solow and Becker-Lucas sectors drive this decline.
Keywords: Human capital, Capital-skill complementarity, Structural transformation, Labor share
JEL Classification: O41, E10, J31
Suggested Citation: Suggested Citation