Labor's Shares – Aggregate and Industry:Accounting for Both in a Model of Development with Induced Innovation

The relative stability of aggregate labor's share constitutes one of the great macroeconomic ratios. However, changes in individual industry labor's shares are essentially statistically independent of one another, and the average values of industry labor's shares vary widely. We present a two-sector model of economic development with induced innovation that can rationalize these phenomena as well as several other empirical regularities of real economies. Specifically, the model can account for (i) manufacturing industries becoming increasingly capital-intensive over time despite (ii) an increase in the relative price and share in total output of service industries; (iii) aggregate labor's share remains within a narrow range despite (iv) individual industry labor's shares being uncorrelated with one another over time. In the long-run the model economy can attain either a neoclassical steady-state or endogenous growth, giving it the potential to account for a wide range of real world development experiences.