2015 Discussion papers
School of Economics Discussion Paper 15/05
Appropriate Technology and
the Labour Share
Miguel A. León-Ledesma and Mathan Satchi
University of Kent
Please see instead the updated 2016 version of this working paper in the University of Kent School of
Economics Discussion Papers series KDPE 1614 under the title
“Appropriate Technology and Balanced Growth.”
We provide a general theoretical characterization of how technology choice affects the long-run elasticity of substitution between capital and labour. While the shape of the technology frontier determines the long-run growth path and the long-run elasticity, adjustment costs in technology choice allow capital labour complementarity in the short run. We develop a class of production functions that are consistent with balanced growth even in the presence of permanent investment-specific or other kinds of biased technical progress but where, consistent with empirical evidence, short-run dynamics are characterized by complementarity. Importantly, the approach is easily implementable and yields a powerful way to introduce CES-type production functions in macroeconomic models. We provide an illustration within an estimated dynamic general equilibrium model and show that the use of the new production technology provides a good match for the short and medium run behavior of the US labour share.
JEL Classification: E25, O33, O40
Keywords: Balanced growth, appropriate technology, elasticity of substitution
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