Disentangling the inuence of directed technical change on factor shares: a new growth accounting method
Abstract
Current growth theories do not allow for the study of the evolution of factor shares at aggregate nor sectoral level – without strong assumptions on the elasticity of substitution between capital and labour. We propose a growth accounting framework that disentangles the factor-savings directions of technical change. We build this framework for two goods, capital and labour, and decompose production evolution between factor substitution, capital- and labour-saving technical change. The technical change is the shift from a Leontief production function to a new production function: the convex envelope of two purely factor-saving deformations of the previous Leontief function. We apply this framework to the US between 1987 and 2019 using the KLEMS database. Therefore, we can decompose the annual output growth for all sectors into three components: technical progress L-saving, K-saving, and factor substitution – using the capital per worker ratio. Technical change has more inuence on output growth than changes in the capital per worker ratio. This technical change is largely L-saving, although the intensity of K-saving technical change is higher than that of L-saving in more than half the sectors. This theoretical framework is validated by better predicting the evolution of the factors shares than is possible with a CES function calibrated on the same database.