Demand-led growth and Technological Progress in a Two-sector Cumulative Causation Model

Abstract

From the viewpoint of Nicholas Kaldor's cumulative causation theory, this paper describes a theoretical investigation into the effects of increased labor productivity growth on output and employment growth. In the macroeconomic framework used to analyze the mutual interdependence of those variables, productivity growth affects other variables through the wage share. For contrast, we construct a two-sector (namely, the investment goods sector and the consumption goods sector) model with an independent investment function and show that increased productivity growth in one sector raises its own output growth through a change of relative prices. Furthermore, because our two-sector model is sufficiently complicated so that various results are generated depending on the parameters, we apply it econometrically to Japan from the 1980s to the beginning of the 2000s. Results show that rapid productivity growth during the 1990s, especially in the investment goods sector, could have raised its output growth, but in reality the possibility was eliminated by the following factors: the slower trend growth of investment, the sharp decline of exports of investment goods, and the low elasticity of investment with respect to profits in both sectors.