The Neoclassical Growth Model and the Labor Share Decline

Abstract

The labor share may be declining in the data, but it is constant in the neoclassical
growth model (NGM). To assess the quantitative importance of this discrepancy,
we compare versions of the NGM featuring constant and declining labor shares, and
find little difference in model performance. Our results derive from strong general
equilibrium effects: while a declining labor share mechanically lowers wage growth,
the investment response pushes wages back up. Hence, different models deliver nearly
identical paths of macro aggregates. Numerous robustness checks (including a CES
production function, different time periods, and calculations of the labor share) reinforce
the similarity of performance across model specifications.

Keywords: Neoclassical Growth Model, Labor Share, AIC, BIC