Distributive channels of productivity gains, labor share and economic growth

This paper studies the relationship between technological progress, labor share and economic growth. With this aim, we develop a two-sector Supermultiplier model to study the impact of process innovations on distribution and GDP growth. Innovations can occur both in the downstream and upstream sectors. We consider different channels through which productivity gains can be distributed across social classes, such as price reductions, monetary wages or markup increases. The impact of different innovations is analyzed according to the specific sector from which it originates. The analysis has been performed providing both simulated and analytical solutions. Our main results show that: i) the technical change can be accompanied by a reduction in the labor share in case the labor productivity improvement is realized in downstream sectors and/or when the technical change translates into an increase in markups. In both cases, capital intensity expands and labor share drops. The opposite occurs in the case of innovations aimed at improving the productivity of capital goods. ii) The innovation process alone is not sufficient to ensure macroeconomic growth, although it always boosts the output per-employee. Depending on the distributive scenario considered and the type of innovation (capital or labor saving), productivity gains have different effects on aggregate demand and GDP growth. In this regard, one of the conclusions that can be derived from the paper is that active fiscal policies are required to ensure stale economic growth while mitigating negative impacts on the employment rate.