labor is more limited, labor’s relative share, even
though a labor-saving technology is being adopted,
can increase.
U.S. cotton production has been rapidly
mechanized in the post World War II period. Given
the relative ease of substitution of capital for labor
(σ> 1) and the labor-saving bias (β> 1) of modern
capital inputs such as cotton pickers, U.S. cotton
labor’s relative share of output has tended to decline
since World War II.
Knowledge of elasticity of factor substitution
can be especially important for policy-makers in
developing economies where labor tends to be rela-
tively abundant. If elasticity of factor substitution is
less than one, then adoption of a labor-saving
technology can actually lead to an increase in labor’s
relative share. However, if elasticity of factor sub-
stitution is greater than one, adoption of a labor-
saving technology will not only displace labor but
moreover labor’s relative share will decline.
One concluding caveat is in order. A decline in
labor’s relative share in a particular industry, or
within a given sector, does not necessarily mean that
those workers who left the industry or sector are
worse off. Workers may be able to obtain employ-
ment in another sector. Furthermore, a decline in
labor’s relative share implies only that the portion of
the value of total output going to labor employed in a
given sector or industry has declined. The labor share
analysis presented in this article is based only on
functional distribution of income—it does not explain
personal income distribution.
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