Capital, Labor, and Productivity

IN A PREVIOUS PAPER I explored two suggestions about how to understand time-series and cross-country variations in measured total factor productivity growth: increases in the labor force might slow technological change and increases in capital might speed it up. 1 Neither suggestion was new. The conjecture about the effect of labor dates back, at least, to attempts to explain the divergence in productivity growth rates observed in the United States and the United Kingdom.2 The suggestion that investment or savings is a fundamental determinant of the rate of growth dates back to Adam Smith. Neither possibility can be considered within the narrow theoretical confines of neoclassical growth theory, but more recent models of endogenous growth show that they can arise in richer economic environments. This paper presents new evidence and new theoretical arguments that bear on these matters. In the theoretical model presented here, the rate of technological change depends on the amount of educated human capital devoted to applied research and development, which is interpreted in a broad sense. The model confirms the conjecture that an increase in the labor force can reduce the rate of technological change under appropriate assumptions about the possibilities for substitution between capital goods, physical labor, and skilled human capital, for example in the form of managers. The rate of improvement in the