Description: Department Seminar: Morten Olsen (University of Copenhagen)

Location: 368A Heady Hall

Contact Person: Juan Carlos Cordoba

Title: "The Foundations of the Cobb-Douglas aggregate production function and the 2/3 labor share"

Abstract: Building on the results of Jones (2005), I show that in an economy where firms differ only in their capital and labor productivity, the aggregate production is approximately Cobb-Douglas.  The labor share is determined by the ratio of the two Pareto coefficients.  Using data from the universe-of Danish firms, I show that the assumption of Pareto distributed labor - and capital conductivites fit the data remarkably well, with relative Pareto coefficients in line with a labor share of 2/3.  I model productivity of firms as a diffusion process and show that this naturally leads to a labor share bigger than 1/2.