Factor Shares, Economic Growth, and the Industrial Revolution

Winner of the James Soltow Award for Best Paper in Essays 2016

Abstract

Despite the transformative nature of the period, growth in the total factor productivity (TFP) residual during the British industrial revolution is typically estimated to have been relatively slow. There is no theoretical reason, however, to limit the manifestation of technical progress to changes in the TFP parameter. This paper acknowledges recent models of share-altering technical progress and provides a growth accounting methodology that allows for variable factor shares. Virtually all existing growth accounting studies pertaining to the British industrial revolution assume that factor shares were constant parameters. The data, however, indicate that factor shares were not constant; labor and land shares decreased during the period while physical capital’s share increased. Implementing a variable factor share methodology reveals that productivity growth rates during the industrial revolution, though modest, were faster than previously thought. Moreover, the variation in factor shares is found to explain up to 4.7% of the variation in output per worker growth, which represents nearly 1/5 of the explanatory power accruing to all observables over the period 1760-1860.