Disentangling the directions of technical change: a new growth accounting method (with M. Senouci)

Current growth theories do not allow for the study of the bias of technical change and the evolution of factor shares —- at aggregate nor sectoral level — without strong assumptions on the elasticity of substitution between capital and labour. We present a growth accounting framework that disentangles the different factor-saving directions of technical change and factor substitution. We build the framework for two primary factors, capital and labour. We represent technical change as the shift of a Leontief production function to a new function which is the convex hull of two shifts of this Leontief production function: one purely labour-saving, the other purely capital-saving. We apply this framework to industry-level data to answer the following questions: What has been the bias of technical change? Does an increase in the price of one factor spurs specific factor-saving innovation? Can we forecast the evolution of factor shares? We find that most industries are capital-biased but with a growing trend of labour-saving technical change. In some industries, we find significant evidence of labour-saving technical change induced by the cost of labour. The framework is validated by better forecasting the evolution of the factors shares than CES, Cobb-Douglas and Leontief functions.