Research Topics

A Comment on Autor and Salomons

We show that Autor and Salomons’ (2017, 2018) analysis of the impact of technical progress on employment growth is problematic. When they use labor productivity growth as a proxy for technical progress, their regressions are quasi-accounting identities that omit one variable of the identity. Consequently, the coefficient of labor productivity growth suffers from omitted-variable bias, where the omitted variable is known. The use of total factor productivity (TFP) growth as a proxy for technical progress does not solve the problem. Contrary to what the profession has argued for decades, we show that this variable is not a measure of technical progress. This is because TFP growth derived residually from a production function, together with the conditions for producer equilibrium, can also be derived from an accounting identity without any assumption. We interpret TFP growth as a measure of distributional changes. This identity also indicates that Autor and Salomons’ estimates of TFP growth’s impact on employment growth are biased due to the omission of the other variables in the identity. Overall, we conclude that their work does not shed light on the question they address.

We use the real wage–profit rate schedule to examine the direction of technical change in India’s organized manufacturing sector during 1980–2007. We find that technical change was Marx biased (i.e., declining capital productivity with increasing labor productivity) through the 1980s and 1990s; and Hicks neutral (increasing both capital and labor productivity) post-2000. The historical experience suggests that Hicks-neutral technical change may only be a passing phase before we see a return to the long-term trend of Marx-biased technical change. We also find that the real profit rate has increased from about 30 percent to a very high 45 percent, that the real wage rate increased marginally, and that the share of capital in value added doubled. Overall, technical change in India’s organized manufacturing sector during 1980–2007 favored capital.

 

We reinterpret unit labor costs (ULC) as the product of the labor share in value added, times a price adjustment factor. This allows us to discuss the functional distribution of income. We use data from India’s organized manufacturing sector and show that while India’s ULC displays a clear upward trend since 1980 (with a decline since the early 2000s), this is exclusively the result of the increase in the price deflator used to calculate the ULC. The labor share of India’s organized manufacturing sector has been on a downward trend, from 60 percent in 1980 to 26 percent in 2007. This means that the sector’s capital share increased from 40 to 74 percent over the same period. We also find that real wages have increased minimally during the period analyzed—well below labor productivity—while the real profit rate and unit capital costs have increased substantially. We conclude that if India’s organized manufacturing sector has lost any competitiveness, it is the result of the increase in unit capital costs. Our analysis questions policy recommendations that advocate wage moderation, which result from simply looking at the evolution of the ULC, and that blame the loss of competitiveness on high or increasing wages.