Labor- and Capital- Augmenting Technical Change

Abstract

I analyze an economy in which profit-maximizing firms can undertake both labor- or capital-augmenting technological improvements. In the long run, the economy looks like the standard growth model with purely labor-augmenting technical change, and the share of labor in GDP is constant. Along the transition path, however, there is capital-augmenting technical change and factor shares change. A range of policies may have counterintuitive implications due to their effect on the direction of technical change. For example, taxes on capital income reduce the labor share in the short run, but increase it in the medium/long run.