# The Neoclassical Growth Model and the Labor Share Decline

## TL;DR

This paper examines how assuming a constant labor share in economic growth models affects predictions, finding that results remain similar even when the labor share declines.

## Contribution

The study shows that general equilibrium effects offset the impact of declining labor shares in neoclassical growth models.

## Key findings

- Model performance is nearly identical with constant or declining labor shares due to investment responses.
- Robustness checks confirm consistent results across different model specifications and time periods.

## Abstract

The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM). We assess the quantitative importance of this discrepancy by comparing alternative calibration approaches featuring constant and declining labor shares. We find little difference in model performance. Our results derive from strong general equilibrium effects: while a declining labor share mechanically lowers wage growth, the investment response pushes wages back up. Hence, different models deliver nearly identical paths of macro aggregates. Numerous robustness checks (including a CES production function, different time periods, and calculations of the labor share) reinforce the similarity of performance across model specifications. We conclude that the NGM with a constant labor share is still an appropriate choice to study many standard macro aggregates.