This paper unveils and explains a new Leontief paradox, where labor-intensive outcomes are larger in economies with significant capital abundance than in labor abundant ones, challenging economic theory on induced technological change. Puzzling evidence has emerged since the end of the twentieth century in the world economy and has been consolidated over the following decades. While the labor share has stopped declining—despite rising wages relative to capital costs—it remains consistently higher in advanced, capital-abundant economies compared with less developed ones, contrary to theoretical predictions which favor reliance on cheaper capital. The paper explores these dynamics using a novel methodology to overcome the identification problem related to the determinants of labor share dynamics. It employs measures of output elasticity of inputs and of the elasticity of substitution to test three interrelated hypotheses: (i) the positive association of labor output elasticity on Total Factor Productivity (TFP) in OECD economies; (ii) the negative relationship between the elasticity of substitution and TFP; and (iii) the stronger magnitude of these dynamics in OECD compared to non-OECD economies. Empirical evidence from 38 OECD and 80 non-OECD countries from 1994 to 2019 is consistent with these hypotheses. Higher labor output elasticity and lower elasticity of substitution are linked to greater factor productivity, particularly in OECD economies. The findings are associated with the critical role of localized learning processes, which are more prevalent in advanced economies and weaker or absent in less developed ones.
Feder et al. (Wed,) studied this question.