On Labor Productivity Growth and the Wage Share with Endogenous Size and Direction of Technical Change

This paper combines induced innovation and endogenous growth to investigate both the relation between the wage share and labor productivity growth and the long-run determinants of the wage share. We assume that myopic competitive firms choose the size and direction of technical change to maximize the growth rate of profits. We first prove that the optimal choice of labor productivity growth may be either a positive or a negative function of the wage share, depending on specific restrictions on the innovation technology. Next, by embedding the microeconomic problem into a Classical growth model, we show that a rise in the saving rate may reduce the steady state wage share. Both results conflict with the standard findings of the induced innovation literature, where labor productivity growth is always a positive function of the wage share and where the steady state labor share is independent of the saving rate