The Neoclassical Growth Model and the Labor Share Decline

The labor share may be declining in the data, but it is constant in the neoclassicalgrowth model (NGM). To assess the quantitative importance of this discrepancy,we compare versions of the NGM featuring constant and declining labor shares, andfind little difference in model performance. Our results derive from strong generalequilibrium effects: while a declining labor share mechanically lowers wage growth,the investment response pushes wages back up. Hence, different models deliver nearlyidentical paths of macro aggregates. Numerous robustness checks (including a CESproduction function, different time periods, and calculations of the labor share) reinforcethe similarity of performance across model specifications.