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International Monetary Fund and George Washington University. The author is indebted to Tamim Bayoumi and Kornélia Krajnyák from the Western Hemisphere Department of the International Monetary Fund for support, guidance, and encouragement in writing this paper. She also wants to thank Christopher Towe, Ratna Sahay, and IMF workshop participants for useful comments.
This assumes that the absolute value of the elasticity of substitution between labor and capital is below one.
The constant returns to scale Cobb-Douglas production function Y=AKαL1-αcannot explain changes in labor and capital shares, since it based on the assumption of constant factor shares in the national income, equal to their respective output elasticities. Namely, capital’s share is always equal to α while labor’s share is equal to (1- α). This means that different types of technology shocks A cannot affect the income shares going to capital and labor.
Data from David Dollar and Aart Kraay “Growth is Good for the Poor”, The World Bank, March 2001.
World Income Inequality Database (WIID), downloaded from the World Bank Website.
Sincere thanks go to Xavier Debrun for sharing his dataset on these variables.
The trade-to-GDP ratio is the most frequently used measure of openness. Since productivity increases might not affect compensation immediately, lagged productivity per worker was used. As a measure of labor’s bargaining power, employment protection is preferred.
Note that two-stage least-squares regression of compensation share on productivity per worker, with lagged productivity per worker being used as an instrument, produced results very similar to those obtained using an noninstrumented regression. Formal Hausman tests also indicate that endogeneity problems are not particularly serious for productivity variables.