(DRAFT - DO NOT CITE OR CIRCULATE) on the two prerequisites of balanced growth
نویسنده
چکیده
In this paper, I argue that the two theoretical prerequisites of balanced growth purely labor augmenting technical progress and a unitary capital-labor elasticity are inconsistent with long-run evidence from a simple decomposition of the post-war U.S. economy into heterogeneous industries. My decomposition is motivated by empirical evidence that the degree of substitution between capital and labor varies across industries and so does the capital-output ratio. Embedded into an otherwise standard macroeconomic framework, I show that the assumption of a single representative consumer with homogeneous preferences over industry value added implies that capital and labor have an elasticity of less than unity on aggregate. Thus, balanced growth relies on technical progress to be purely labor augmenting which further implies that technical progress is higher in industries that have a lower capital-labor elasticity and a lower capital-output ratio. In long-run U.S. data, however, I find no evidence that supports such a relation. Yet, I show that the network structure of the post-war U.S. economy can induce balanced growth through demand side heterogeneity in the industries’ intermediate input-output linkages. I show that this mechanism can sustain balanced growth for long periods under a variety of empirically plausible parameter assumptions. JEL: E1, E13, O41
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