Jianpo Xue

Factor Substitution And Economic Growth: A Unified Approach

This paper provides a unified approach to characterizing the relation between factor substitution and economic growth in different one-sector growth models (namely, the Solow, Ramsey, and Diamond models). Our main finding is that if better factor substitution raises savings in the steady state, then a higher per capita income results. There are two channels by which factor substitution affects savings: the positive efficiency effect via income and the ambiguous distribution effect via factor income shares. If the efficiency effect dominates, then a higher elasticity of substitution leads to a higher level of per capita steady-state income. In transition, factor substitution affects the rate of convergence both directly and through the equilibrium profit share. The former arises from diminishing marginal productivity of capital whereas the latter reflects its relative scarcity. Depending on the interaction of these effects, the net outcomes are characterized.

Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy

This paper examines the stabilizing property of consumption taxation in a balanced-budget setting of a neoclassical one-sector cash-in-advance economy. We find that saddle-path stability is not a necessary outcome even though the utility function is additively separable between consumption and leisure. Both the existence of a Laffer curve and the indeterminacy outcome of consumption taxation depend on the elasticities of intertemporal substitution in consumption and of labor supply. Numerical examples show that consumption tax may lead to aggregate instability for the OECD countries under the current over-easy monetary policies.

Chapter 17 Illegal Immigration, Factor Substitution, and Economic Growth

This chapter develops a neoclassical growth model of illegal immigration with imperfect substitutability between native and immigrant workers in production. We investigate analytically and/or numerically the effects of illegal immigration on the average capital stock in the host economy as well as on the wage, income, and asset holdings of native workers. Our findings indicate that the effects of an increase in illegal immigration on the average levels of capital, consumption, and income are positive. Moreover, by employing the normalization technique (e.g., Klump & de La Grandville, 2000), we examine the effects of a change in the elasticity of substitution between immigrant workers and natives for any given immigration ratio. These effects are in general ambiguous, because of the presence of two opposing forces: the efficiency and the distribution effects. Finally, we extend the model by separating the domestic workers into skilled and unskilled and study the impact on distribution of income and wealth. We show that illegal immigration may not necessarily make the distribution of wealth more unequal and unskilled labor worse off. This is because the end results depend on the elasticities of substitution between different types of labor. Thus, assuming erroneously that immigrants and natives are perfect substitutes could lead to results that are not only overestimated but also of the wrong sign.