Innovation and labor share: Disentangling emerging global technological trends

This paper advances our understanding of the transformative role of innovation in labor share dynamics over recent decades of rapid technological evolution. We introduce a novel methodology to disentangle the direction and substitution effects of technological change, drawing on comprehensive Penn World Table (PWT) data across 136 countries from 1991 to 2019. The findings reveal notable temporal and spatial variability, challenging fixed-parameter assumptions within traditional production functions. Key insights include: (i) developed economies exhibit a labor-oriented direction of technological change compared with developing countries; (ii) there is a pivotal shift from capital-augmenting to knowledge-augmenting technological paths in developed economies; (iii) there is a persistent complementarity between capital and labor. These results suggest that labor-oriented technological advancements are boosting labor share growth, especially in knowledge-driven economies. Finally, we explore the profound implications of these findings for political and corporate strategy.