Marx-­Biased  Technical  Change  and  Income  Distribution:  A  Panel  

Data  Analysis  

By TRAVIS CAMPBELL AND DANIELE TAVANI*

Abstract

This paper provides a further empirical evaluation of the

distributional implications of Neoclassical growth theory as opposed
to Marx-biased technical change by applying the theoretical and
empirical framework developed by Foley and Michl (1999) and Basu
(2010) to a panel of countries. Basu (2010) developed a test based on
cross-sectional data: we argue that a panel data analysis is
instrumental in increasing the efficiency and validity of the test. Our
results generalize Basu’s findings, and reject Neoclassical theory.

*Department of Economics, Colorado State University. 1771 Campus Delivery, Fort Collins, CO 80523-1771. Email:
Daniele.Tavani@Colostate.edu. We thank Deepankar Basu for useful comments on a previous draft. All errors are ours.

I. Introduction

Two fundamental differences between the Classical and Neoclassical theories of

economic growth and income distribution pertain to how each theory regards the
degree of substitutability between capital and labor on the one hand, and the
determination of real wages on the other. With regards to the first problem,
Neoclassical economics relies on the notion of a twice-continuously differentiable,
linearly homogeneous aggregate production function involving instantaneous,
although imperfect, substitution between capital and labor. The Cambridge capital
controversy of the 1960s has highlighted the logical issues involved with the notion
of an aggregate production function, and points toward specifying production
technologies in terms of single output coefficients, which imply perfect
complementarity between capital and labor. As far as distribution is concerned,
Neoclassical theory sees income distribution as technologically determined by
equality between factor prices and factor marginal products in production. Vice
versa, in Classical-Marxian economics income distribution is determined through
institutional forces: in particular, real wages can be different from the marginal
product of labor because of social stratification, relative bargaining power of
different classes, or other institutional causes.
The growth and distribution approach of Marglin (1984) and Foley and Michl
(1999) builds on previous work by economists on the winning side of the
Cambridge capital controversy (Robinson, 1954; Kaldor, 1961; Pasinetti, 1962;
Garegnani, 1970) to provide an analytical framework that is useful to evaluate these
competing theories on empirical grounds. An economy’s production technique is
defined by its labor productivity, output/capital ratio, and depreciation rate
(𝑥, 𝜌, 𝛿). Denoting the real wage by w and the gross profit rate by v, simple national
accounting in a closed economy without government implies the wage-profit
relation:

+
(1) 𝑣 = 1− 𝜌
,

Consider an alternative technique 𝑥 - , 𝜌- , 𝛿 with the same depreciation rate as

the original technique, but with different output coefficients of labor and capital:
𝑥 - = 1 + 𝛾 𝑥, 𝜌- = 1 + 𝜒 𝜌, where 𝛾, 𝜒  denote the growth rate of labor
productivity and of the output/capital ratio respectively. For a given real wage, the
 +
alternative technique will have its own profit rate 𝑣 - = 𝜌′(1 − 3 ). A standard
,

criterion for the choice of technique proposed by Okishio (1961) is that a profit-
maximizing competitive firm will choose the latter technique over the former if
𝑣 - ≥ 𝑣, that is a new technique of production will be chosen if it does not decrease
the profit rate at a given wage. Defining the share of profits in production by 𝜋 ≡
1 − 𝑤/𝑥, the choice of technique criterion can be restated in the following way
(Foley and Michl, 1999, Chapter 7):

< =>?
(2) 𝜋 ≤ π∗ ≡
<@?

The criterion posits that if the observed profit share is no greater than the threshold
parameter π*, the technique is viable and will be adopted. A generalization that
includes wage growth is due to Basu (2010), and involves a generalized viability
parameter π1* satisfying:

<
(3) π ≤ π=∗ ≡
<  –  ?  

Because both the actual profit share π and the productivity growth parameters
𝛾, 𝜒  can be obtained using real-world data, the criterion provided by (2) or (3) can
be used in order to evaluate the two theories empirically. In fact, while the choice
of technique criterion applies to both Classical and Neoclassical theories, the two
paradigms differ with respect to their implications about how binding the
inequalities (2) and (3) should be. An institutional determination of income
distribution in Classical economics is compatible with strict inequalities holding in
either (2) or (3); in Neoclassical economics, on the other hand, profit-maximization
requires that wages be equal to the marginal product of labor, with the implication
that the economy must always operate at a switch point between a more capital-
intensive and a less capital-intensive technique –a point where for a given wage
(profit rate) two techniques give the same profit rate (wage). Consequently, if the
Neoclassical theory of distribution is correct, equation (2) or (3) should be satisfied
as strict equalities (Foley and Michl, 1999; Michl, 1999). Therefore, the
Neoclassical theory requires the profit share to equal the threshold identified by the
viability condition:

(4) π = π∗
On the other hand, since MBTC allows for wages to depart from the marginal
product of labor, any technique that increases the profit rate at the current (or even
at a higher) wage, that is a technique satisfying

(5) π ≤ π∗

is considered viable and will be adopted.  

Foley and Michl (1999, Ch. 7) provide a first empirical evaluation of equations
(4) and (5). The viability parameter can be calculated from real-world data using
the right-hand sides of (2) and (3), and plotted against the 45° line through the origin
that represents the linear equation π* = π. If most points lay above the 45° line, then
the evidence supports MBTC; if the points lay on the line then the plot favors
Neoclassical theory.
Basu (2010) has argued that such deterministic test amounts to rule out stochastic
influences intrinsic to π* and π. Accordingly, he utilized a cross-sectional estimator
to evaluate the conditional expectation E[π*|π] = π. This formulation allows for
testing the sample average relationship between π* and π, rather than to test the
exact relationship as done in Foley and Michl (1999).
Using equations (4) and (5), Basu (2010) runs cross-sectional regressions from
data spanning 1963-2000, taking averages, to test if E[π*| π] = π using the models

(6) π∗B = βD + β= πB + εB
(7) π∗B = βD + β= πB + βF 𝑥B + βG 𝐹𝑒𝑟𝑡𝑖𝑙𝑖𝑡𝑦B + εB

Under equation (6), testing E[π*| π] = π corresponds to the following null

hypothesis: β0 = 0 and β1 = 1, while equation (7) uses the null hypothesis β0 = β2 =
β3 = 0, β1 = 1. Rejection of the null hypothesis in either model implies supporting
the view of MBTC, while failing to reject either null hypothesis corresponds to
supporting Neoclassical theory. The same process is repeated to test whether E[π1*|
π] = π. In both cases, the null hypothesis is strongly rejected, contradicting the
Neoclassical view. Basu (2010) carries out the test twice: first, he uses data for all
available countries; second, he restricts the sample to OECD countries only.

II. Assessment

We argue that the estimation technique used by Basu (2010) is prone to criticism
on the following grounds: (a) the inclusion in the sample of theoretically unsound
values for the viability condition, (b) the homogenization of production
technologies implied by cross-country regressions and (c) the omission of non-
OECD observations. We address these issues in turn.

A.   Viability Condition: Top- and Bottom-Coding

The denominators of equations (1) and (2) imply that if the difference of the
growth rate of labor productivity and the growth rate of capital productivity is close
to zero, then the viability parameters will be extremely large in magnitude. In
practice, this results in estimating viability parameters vastly greater than 1 or less
than 0. A value of π*>1 implies that the resulting profit share from the change in
technique must be over 100 percent and a value of 𝜋*<0 can be attributed to
sampling error.
 Unbounded viability parameters will also bias results toward rejecting the
Neoclassical theory because actual profit shares are bounded below by zero and
above by one. If the viability parameter is unbounded, a few influential
observations will drastically change the parameter estimates and likely point toward
rejecting the null 𝜋 = 𝜋*. Bounding the viability parameters by 0 and 1, on the
other hand, does not alter the interpretation of the observations: for example, if 𝜋 <
𝜋*=20 then a country is exhibiting MBTC and recoding 𝜋*=1 will not alter the
conclusion. Conversely, failing to bound the viability threshold could result in
biased estimation results due to outliers: Figure 1 depicts the magnitude of outliers.
For this reason, we will top- and bottom-code the values for both π* and its
generalized analogous: any values for π*<0 will be recorded as 0 and any values
for π*>1 will be recorded as 1.
[Insert Figure 1 Here]

B. Panel Estimation

The cross-sectional model employed by Basu (2010) homogenizes each

country’s technologies due to the postulated existence of a single intercept
parameter for all countries. Furthermore, a pure cross-country estimator that takes
country averages across 40 years of data results in a dramatic loss of observations.
The latter problem can be resolved by incorporating time series methods. The
former problem can be partially addressed with the inclusion of a regional,
qualitative control that would capture the difference in production functions for
developing versus developed countries. However, the use of a regional dummy
would still imply the assumption of regional homogeneity. While only assuming
technologies are regionally homogenous may be a weaker assumption than all
countries having an identical production function, the assumption is not necessary.
 The use of a fixed effects panel estimation allows for each country’s technology
to vary independently, while also incorporating the time dimension in the sample.
This will increase the variability in data and lower collinearity (Gujarati and Porter,
2009). Furthermore, technological heterogeneity can be incorporated by using
country-specific fixed effects, and has been shown to account for differences in
production functions across countries, as argued by Islam (1995). Finally, past
technological differences, a fixed effects regression controls for time invariant
differences between the countries. Since all the exogenous regressors proposed by
Basu (2010) are time-varying, the use of fixed effects ensures that slope estimates
cannot be biased from omitted time-invariant, country specific qualities that may
not even be measurable (Kohler & Frauke, 2012 p. 245). Thus, a fixed effects panel
estimation eliminates the need for assuming partial or full homogeneity.
The major disadvantage to fixed effects regression is the exhaustion of degrees
of freedom. In the context of this paper, using fix effects regression requires the use
of 126 degrees of freedom for all 126 countries used in the final model. Therefore,
if the more efficient alternative, namely a random effects regression, can estimate
consistently, then it is to be preferred. We will perform Hausman tests to evaluate
the appropriateness of random effects.

C. Interaction Variable

When Foley and Michl (1999, Ch. 7) carry out their early empirical test of the
relationship between 𝜋 and 𝜋*, the plot forcefully demonstrates that advanced
capitalist countries operate with wages exceeding the marginal product of labor.
Basu’s replication of the test also shows a relationship between the degree of
economic development and the presence of MBTC. Since the plots provide
evidence that the relationship between the viability condition and profit share is
different for OECD countries and non-OECD countries, Basu runs the cross-
sectional test twice: once using data for all countries and once using data for OECD
members only. By comparing the results of the two tests, Basu evaluates whether
the wage share assumption of Neoclassical economics is satisfied for advanced
countries only or if the assumption is satisfied globally. We argue that it is possible
distinguish the relationship for both OECD and non-OECD countries without
splitting the sample, greatly increasing the amount of information utilized in the
test.
Instead of estimating a second OECD regression that requires removing most
observations, we will use an indicator variable taking value OECD = 1 if a country
is a member and OECD = 0 if a country is not a member. We will also include the
interaction 𝜋 ∗ 𝑂𝐸𝐶𝐷. The inclusion of these two independent variables leads to
two hypotheses for the single regression that separately tests the competing theories
for OECD and non-OECD countries. We will also estimate the simple linear
regression to test the relation for all countries jointly.
The downside of adding the interaction variable is the increased chance of severe
multicollinearity for 𝜋 and 𝜋 ∗ 𝑂𝐸𝐶𝐷, which can inflate the variance estimates for
effected parameters and entail substantial fluctuation in coefficient estimates across
models. Below, we will provide variance inflation factors (VIFs) with the summary
statistics to ascertain the degree of variance inflation. We will also formally test the
severity of the coefficient fluctuation by using a cross-regression hypothesis test to
analyze the statistical significance of the coefficient variation.1 Because the
addition of controls slightly changes the sample size, the robust standard errors used
in the cross-model tests will be slightly smaller than the individually fitted models.
If the null hypothesis of cross-model coefficient equality is rejected, we conclude
that collinearity was severe enough to cause a statistically significant fluctuation in
the parameter estimates or the estimates may not be robust to development controls.

1
This test will be conducted with the suest command in Stata, which uses a simultaneous covariance matrix.
 Severe collinearity, however, does not decrease the overall reliability of the
model, and OLS estimates still provide the minimum variance, unbiased estimator.
The primary consequence of severe collinearity for our purposes is the plausible
increased width of coefficient confidence intervals, which favors failing to reject
the null hypotheses of equations (13) and (14): thus, collinearity may favor the test
towards neo-classical theory. We take this potential problem with our estimator as
benign in that, if a bias is present, it is against our theoretical prior on the competing
theories of distribution.

III. Data and Model

The data for labor productivity (x), wage share (ws), rate of labor saving technical
progress (𝛾), rate of capital saving technical progress (𝜒), and fertility is taken from
the Extended Penn World Tables 6.0 (EPWT) at current PPP. The EPWT is used
over the Penn World Tables (PWT) data set because capital and productivity
measures in the latter are inconsistent when comparing multiple countries at
different points in time (PWT 8.0 Documentation), making the PWT capital stock
estimates incompatible with panel estimation. Per the EPWT 6.0 documentation,
the EPWT capital stock estimates overcome this problem by applying the perpetual
inventory method (see Hulton and Wycoff, 1981) which assumes that all assets
have identical and high depreciation rates; this method does not bias capital stock
estimates (Blades, 1993) and enhances international comparability (Groote, Albers,
and de Jong, 1996). Finally, and perhaps more importantly, the use of the EPWT
makes our results immediately comparable with those in Basu (2010).
Using said variables, the profit share (𝜋) is constructed according to:

(8) 𝜋 = 1 − 𝑤𝑠
while π* and π1* are constructed as per equations (2) and (3). We include labor
productivity and fertility rates as regressors in order to control for economic
development as well as the demographic transition: highly developed economies
tend to be characterized by low fertility and high labor productivity, while
developing economies tend to display high fertility and low labor productivity.
Other than being in accordance with Basu (2010), the use of these controls sits quite
well with the logic of MBTC, which holds the viability condition as endogenous to
the capital income share and other determinants of economics development.
In what follows, we run two sets of regressions: cross-sectional and panel
estimation. For the cross-sectional regression, which serve the purpose of a
replication exercise with regards to Basu’s (2010) results, each variable is averaged
from 1967-2014, or the latest available data point. Average values for the viability
parameters are then top- and bottom-coded as described previously. To account for
regional discrepancies in production functions, the cross-sectional and random
effects models will include additional regional dummy variables for African
countries, OECD countries, and the interaction variable discussed above.2 The
cross-sectional models are

(9) π∗B = βD + β= πU + εB

(10) π∗B = βD + β= πU + βF OECDU + βG πU ∗ OECDU + βZ Africa + εB

(11) π∗B = βD + β= πU + βF OECDU + βG πU ∗ OECDU + βZ Africa + βa 𝑥B +

βb 𝐹𝑒𝑟𝑡𝑖𝑙𝑖𝑡𝑦B + εB
The null hypothesis for equation (9) is

(12) 𝐻D :  𝛽D = 0, 𝛽= = 1

2
The interaction variable between the African indicator variable and 𝜋 is not considered based on the interpretation of
figures (2) and (4) given in section IV (A).
Equation (10) leads to the null hypotheses:

(13) 𝐻D :  𝛽D = 0,  𝛽= = 1

𝐻D 𝑂𝐸𝐶𝐷 :  𝛽D + 𝛽F = 0,  𝛽= + 𝛽G = 1
𝐻D 𝐴𝑓𝑟𝑖𝑐𝑎𝑛 :  𝛽D + 𝛽Z = 0,  𝛽= = 1

Finally, equation (11) uses the null hypotheses:

(14) 𝐻D :  𝛽D = 𝛽a = 𝛽b = 0,  𝛽= = 1

𝐻D 𝑂𝐸𝐶𝐷 :  𝛽D + 𝛽F = 𝛽a = 𝛽b = 0,  𝛽= + 𝛽G = 1
𝐻D 𝐴𝑓𝑟𝑖𝑐𝑎𝑛 :  𝛽D + 𝛽Z = 𝛽a = 𝛽b = 0,  𝛽= = 1

to test if E[𝜋 ∗ | π] = π and if E[𝜋=∗ | π] = π.

For the panel estimation, the data are collapsed into five year averages in order
to smooth out business cycle fluctuations. The models utilize the first lag of the
control variables to account for the time delay between changes in fertility and labor
productivity with changes in development. Below, we report both fixed and random
effects models. The regional intercepts must be omitted from the fixed effects
model due to perfect multicollinearity: all variation from region is captured by the
country specific fixed effects. We also report a Hausman test statistic to ascertain
the appropriateness of the random effects models. The null hypothesis of the
Hausman test is that the estimates from the fixed and random effects models do not
differ substantially. If the null hypothesis is rejected, the random effects model is
not appropriate due to correlation between the random effects and regressors
(Gujarati and Porter, 2009 p. 605). The fixed effects, within group models are:

(15) π∗B,l = βD + β= πB,l + νB,l

(16) π∗B,l = βD + β= πB,l + βF πU,n ∗ OECDU + νB,l

(17) π∗B,l = βD, + β= πB,l + βF πU,n ∗ OECDU + βG 𝑥B,l@= + βZ 𝐹𝑒𝑟𝑡𝑖𝑙𝑖𝑡𝑦B,l@= + νB,l

In the context of within group, fixed effects models, the intercept above, 𝛽D ,
represents the average fixed effect. The model is estimated with OLS after
subtracting out the country mean and adding the overall mean for each variable.
The random effects models are:

(18) π∗B,l = βD + β= πB,l + νB,l

(19) π∗B,l = βD + β= πB,l + βZ 𝐴𝑓𝑟𝑖𝑐𝑎B,l + νB,l

(20) π∗B,l = βD + β= πB,l + βZ 𝐴𝑓𝑟𝑖𝑐𝑎B,l + βa 𝑥B,l@= + βb 𝐹𝑒𝑟𝑡𝑖𝑙𝑖𝑡𝑦B,l@= + νB,l

The fixed and random effects models use the same hypothesis tests as equations
(12-14), omitting the regional intercepts for the fixed effects model.

IV. Results

This section includes three testing methods to determine whether π*>π. The first
test is a replication of the deterministic test by Foley and Michl (1999, Chapter 7)
in which a scatter of π* on π is used to visually evaluate the exact relationship
between these parameters. The second test corresponds to the methodology of Basu
(2010), which assesses the average relationship between π* and π by utilizing a
cross-sectional regression of averaged values, subject however to the top- and
bottom- coding described above. The final test uses our preferred panel estimation
to test the sample average relationship between π* and π: these results are of the
most interest to this study. All tests are conducted at 95% confidence.
 A.   Viability Condition and Profit Share Scatter Plots

Following Foley and Michl (1999, Chapter 7), the simplest test to see if the
viability parameter equals the profit share is to plot a set of points with coordinates
(π, π*) –each point representing a specific country—against the 45° line passing
through the origin. If the points lie near the line then they align with Neoclassical
theory, if points lay on the line or in the region of the line, they align with MBTC.
Three plots are supplied below. The first plot includes all countries, the second plot
includes only OECD countries, and the third plot includes only African countries.

[ Insert Figure 2 Here ]

[ Insert Figure 3 Here ]
[ Insert Figure 4 Here ]

As already noted by Basu (2010), this simple deterministic test is inconclusive.

The first figure does not conclusively reject the Neoclassical theory. However,
when only accounting for OECD countries, the plot strongly supports MBTC in
favor to Neoclassical theory, as in Foley and Michl (1999, Chapter 7) as well as
Basu (2010). African countries seem to consolidate mostly below the 45-degree
line, contradicting both theories, but the presence of some African countries well
above the 45-degree line casts some doubt on this conclusion. Furthermore, none
of the plots seem to directly support the Neoclassical theory. The plots display a
positive association between economic development and viability parameters
exceeding the profit share, implying that advanced capitalist countries are more
likely to exhibit MBTC.

B.   Cross-Sectional Regressions

[ Insert Table 1 Here ]

 [ Insert Table 2 Here ]
[ Insert Table 3 Here ]

Six regression are reported in Table 3. The first of each group is a simple
linear model that tests the sample average wage share relation for all countries. The
estimates using either endogenous variable, the viability or generalized viability
parameter, overwhelmingly reject Neoclassical theory in favor of MBTC.
The second set of regressions include the regional indicator variables OECD
and Africa to allow for regional variability in the production function. This set also
includes the interaction variable 𝜋 ∗ 𝑂𝐸𝐶𝐷 to see if the association between the
profit share and viability condition behaves differently for OECD countries than
the sampled non-OECD countries, as indicated by figures (2) and (3). Our sample
rejects Neoclassical theory at 95% confidence for OECD, African, and all other
sampled countries when using either the viability or generalized viability condition.
The varying size of the F statistics suggest that MBTC is most strongly exhibited
by OECD countries.
The last set of regressions controls for labor productivity and fertility which, as
suggested by Basu (2010), have been shown to be strong associates of economic
development. Taken together, this set of regressions most fully accounts for the
maturity of the capitalist economy. Again, these tests reject the null hypothesis of
equality between the profit share and viability parameter for OECD, African, and
all other sampled countries at 95% confidence. The results continue to suggest, by
magnitude of F statistics, a positive association between capitalist maturity and
MBTC.
The primary purpose of this paper is to test if the viability parameter and the
profit share are equal on average; hence, our main interest is not necessarily in the
parameter estimates but rather in the value of the F-statistic from equations (12-14).
All the six regressions above reject Neoclassical theory at 95% confidence,
supporting MBTC for all sets of countries.
It should be noted that introducing the interaction 𝜋 ∗ 𝑂𝐸𝐶𝐷 causes
collinearity, inflating the variance estimates of OECD and 𝜋 ∗ 𝑂𝐸𝐶𝐷. This inflation
is shown by the large Variance Inflation Factors (VIFs) in table (1). Correlation
between these variables is expected since they are so closely related. A possible
consequence of this collinearity is increased variability in coefficient estimates, in
F
this case 𝛽F and 𝛽G . Across all models, however, the 𝜒opqrsBlt statistics suggest that
all coefficient estimates are not significantly different.

C.   Panel Estimation

[ Insert Table 4 Here ]

[ Insert Table 5 Here ]
[ Insert Table 6 Here ]
[ Insert Table 7 Here ]
Again, the primary purpose of this paper is to investigate the sample average
relationship between the viability parameter and the profit share as a means of
empirically evaluating the Neoclassical theory of distribution; hence, the F and 𝜒 F
tests are of more interest than each parameter estimate. The panel regressions
reported in tables (6) and (7) all reject Neoclassical theory at 95% confidence in
favor of MBTC. The size of the F statistics from the fixed effects models are similar
when testing all countries, OECD or non-OECD specifically. The 𝜒 F statistics from
the random effects models seem to convey that the exhibition of MBTC is strongest
for OECD countries: a conclusion that reinforces the results of scatter plot test and
the cross-sectional regressions. Both fixed and random effects model groups
overwhelming reject Neoclassical theory for all three iterations. However, the
Hausman test suggests the first two random effect regression results are erroneous.
 The results convey that collinearity and omitted variable bias could be present.
F
The Wald tests for equality across fixed effects regression, 𝜒opqrsBlt , is rejected at
95% confidence for both 𝜋 and 𝜋 ∗ 𝑂𝐸𝐶𝐷. The rejection of this null hypothesis
implies that the parameter estimates are significantly different, which may imply
that we are not controlling for necessary time variant determents of the viability
parameter or collinearity could be causing estimate fluctuation. While the VIFs for
OECD and 𝜋 ∗ 𝑂𝐸𝐶𝐷 displayed in table (4) are lower than in the cross-section
model, they are still quite large suggesting that correlation between the two
variables may inflate each parameter’s standard error. As stated, this problem could
cause variability in each of the variables beta estimate. Since OECD is either
captured by the fixed effects or explicitly included, this may be contributing to the
variability in the betas across the three regressions. This estimate variability will be
meticulously examined in the next section.

V. Robustness

In this section, we assess the validity of the previous results by testing if the
results were predicated on particular model selections. In this robustness check, we
include three additional control parameters, and we carry tests to account for
variability in estimation caused by using fixed effects versus random effects and
the inclusion or exclusion of various controls. The focus of the robustness test is to
analyze the fluctuation in the coefficients for 𝜋 and 𝑂𝐸𝐶𝐷 ∗ 𝜋 that could be caused
by the addition and omission of control variables and to investigate how this process
influences the conclusion of the test.
The three additional covariates are schooling, institutional quality, and openness
to trade. These parameters serve as proxies for the unobserved drivers of the
viability condition corresponding to unobserved, time variant economic
development and institutional influences: schooling is used as a proxy for human
capital, while institutional quality and openness to trade further control for the depth
of capitalist development. One set of random effects models will still include the
previously described qualitative variables Africa and OECD to achieve partial
heterogeneity for the various regions’ production technologies.
The data for openness to trade is obtained from the World Development
Indicators (exports plus imports as a percent of GDP). The institutional quality
variable is taken from Freedom House. The Freedom House dataset rates each
country’s institutional quality on a scale from 1 to 7, where 1 corresponds to ‘most
free’ and 7 corresponds to ‘least free’. The index is an average score of the ratings
for political rights and civil liberties. The World Bank indicators of governance
and institutional quality ranks Freedom House highly for coverage across countries,
coverage over time, and use in published studies. The schooling data is taken from
the Barro-Lee’s Education Attainment for Population Aged 25 and Over, which
supplies data as five-year averages for 1950-2010. Only complete observations are
used to maintain a constant sample size for all regressions.
The results of the robustness test are summarized in Table 10. The table displays
estimates for the four different techniques: fixed effects estimation with and without
𝑂𝐸𝐶𝐷 ∗ 𝜋 and random effects estimation with and without OECD, 𝑂𝐸𝐶𝐷 ∗ 𝜋 and
Africa. The table includes the minimum, maximum and average value of the
estimated coefficient for π and 𝑂𝐸𝐶𝐷 ∗ 𝜋, derived from 32 regressions for each
possible combination of the six additional covariates. To clarify, the minimum,
maximum, and average values are obtained by running every combination of the
three test parameters previously described: 32 regressions are estimated using all
combinations of the 6 test parameters for each of the four models. The last row of
the table will state the percent of the regressions that reject the null hypothesis given
in equations (12-14), adding or removing the 6 test covariates as necessary.
[ Insert Table 8 Here ]
[ Insert Table 9 Here ]
 [ Insert Table 10 Here ]
F
All tests for coefficient equality across all fixed effects models, 𝜒opqrsBlt , fail to
reject the null hypothesis of equal estimates at 95% confidence. These tests indicate
that the parameter estimates for the profit share, 𝜋, and the interaction, 𝜋 ∗ 𝑂𝐸𝐶𝐷,
are robust to additional control variables, suggesting that omitted variable bias is
negligible and that collinearity is not causing significant fluctuation.
The estimated parameter value for the profit share does, however, change
between the fixed and random effects estimators, suggesting that some of the
random effects models are generating inconsistent estimates. This inconstancy is
expected since most of the Hausman tests reported in tables (6) and (7) concluded
that the random effects models, which were all re-estimated during the robustness
test with a restricted sample, were inconsistent. The use of random versus fixed
effects does not influence the resulting F or 𝜒 F - test that is our primary concern.
Every test rejected Neoclassical theory in favor of MBTC at 95% confidence.
The magnitude of the F and 𝜒 F statistics do not seem to show OECD countries
exhibiting MBTC any stronger than non-OECD, a result that was conveyed by prior
models.

VI. Conclusion

In this paper, we provided a generalization of the empirical test devised by Basu

(2010) to distinguish between the Neoclassical and the MBTC theory of
distribution. We argued that the cross-country estimates provided by Basu (2010)
are: (a) affected by the unnecessary assumption of identical technologies across
countries, (b) biased by the lack of top- and bottom-coding of the viability
parameter and (c) inefficient do to the unnecessary removal of non-OECD
observations. We addressed these problems by making use of a panel fixed effects
and random effects model, by top- and bottom- coding the viability threshold and
by including and OECD interaction term. All the models we ran, including models
that incorporate additional control variables such as schooling, international
quality, and openness to trade, appear to empirically reject the Neoclassical theory.
We take these empirical results as pointing toward an institutional rather than
technological determination of the factor income distribution: modeling efforts
aimed at shedding light on the interaction between growth and distribution and its
implication for economic development should focus on the institutional causes that
affect the distribution of income.
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 VII. Tables

TABLE 1—SUMMARY STATISTICS C OUNTRY A VERAGES

Observations Mean Std. Dev. Minimum Maximum VIF

𝜋∗ 164 0.533 0.305 0 1
𝜋=∗ 164 0.540 0.304 0 1
π 128 0.467 0.123 0.148 0.802 1.49
OECD 164 0.213 0.411 0 1 43.54
𝜋 ∗ 𝑂𝐸𝐶𝐷 128 0.109 0.181 0 0.551 39.63
Africa 164 0.287 0.454 0 1 2.32
x 164 30142.8 27349.04 1582.502 162157.7 2.28
Fertility 163 3.547 1.742 1.087 7.682 3.25
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 2—C ORRELATION C OEFFICIENTS C OUNTRY A VERAGES

π* π OECD 𝜋 ∗ 𝑂𝐸𝐶𝐷 Africa x Fertility

π* 1
π 0.0501 1
OECD 0.1387 -0.3392 1
𝜋 ∗ 𝑂𝐸𝐶𝐷 0.1275 -0.2922 0.9856 1
Africa -0.3134 0.0169 -0.3505 -0.3454 1
x 0.1991 0.0533 0.5239 0.4982 -0.4999 1
Fertility -0.1941 0.1908 -0.4798 -0.4576 0.7425 -0.6450 1
Notes: Observations = 127
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 3—C ROSS SECTIONAL

F F
Dependent variable: 𝜋 ∗ 𝜒opqrsBlt Dependent variable: 𝜋=∗ 𝜒opqrsBlt

Cons. 0.477 0.458 0.396 0.78 0.484 0.465 0.407 0.69

(0.124) (0.162) (0.180) (0.678) (0.124) (0.161) (0.180) (0.708)
π 0.120 0.236 0.166 1.24 0.121 0.238 0.173 1.21
(0.261) (0.306) (0.325) (0.537) (0.260) (0.306) (0.324) (0.545)
OECD 0.351 0.350 0.00 0.349 0.348 0.00
(0.277) (0.307) (0.993) (0.277) (0.307) (0.991)
𝜋 ∗ 𝑂𝐸𝐶𝐷 -0.763 -0.758 0.00 -0.756 -0.750 0.00
(0.633) (0.676) (0.982) (0.636) (0.678) (0.980)
Africa -0.199 -0.252 0.65 -0.200 -0.249 0.56
(0.070) (0.073) (0.421) (0.070) (0.073) (0.453)
x 0.000 0.000
(0.000) (0.000)
Fertility 0.026 0.024
(0.031) (0.030)
N 128 128 127 128 128 127
F 8.93 4.59 2.57 9.76 4.96 2.73
(0.000) (0.012) (0.042) (0.000) (0.008) (0.032)
F - OECD 23.77 11.99 26.11 35 13.08 35
(0.000) (0.000) (0.000) (0.000)
 F – Africa 4.97 3.17 2.94
(0.008) (0.016) (0.023)
Notes: Robust Standard Error in parenthesis below estimates, F & 𝜒 F -test P-value below F & 𝜒 F -statistics.
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 4—SUMMARY STATISTICS 5 Y EAR A VERAGE

Observations Mean Std. Dev. Minimum Maximum VIF

∗
𝜋 1202 0.502 0.315 0 1
𝜋=∗ 1202 0.508 0.314 0 1
π 1083 0.464 0.125 0.148 0.858 1.42
OECD 1804 0.213 0.410 0 1 30.59
𝜋 ∗ 𝑂𝐸𝐶𝐷 1083 0.122 0.187 0 0.614 27.61
Africa 1804 0.287 0.452 0 1 1.72
xt-1 1204 28108.43 28724.83 576.357 228467.6 1.97
Fertilityt-1 1194 3.836 1.950 0.855 8.437 2.34
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 5—C ORRELATION C OEFFICIENTS 5 Y EAR A VERAGE

π* π OECD 𝜋 ∗ 𝑂𝐸𝐶𝐷 Africa xt-1 Fertilityt-1

π* 1
𝜋 0.0068 1
OECD 0.0411 -0.3630 1
𝜋 ∗ 𝑂𝐸𝐶𝐷 0.0244 -0.2924 0.9791 1
Africa -0.1492 0.0724 -0.3929 -0.3846 1
xt-1 -0.0260 0.0213 0.5335 0.5237 -0.4379 1
Fertilityt-1 -0.0870 0.1490 -0.5084 -0.4867 0.6384 -0.6162 1
Notes: Observations = 943
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 6—PANEL ESTIMATION V IABILITY C ONDITION (𝜋 ∗ )

F
Fixed Effects 𝜒opqrsBlt Random Effects

Cons. 0.839 0.857 0.997 1.04 0.538 0.514 0.576

(0.141) (0.129) (0.203) (0.595) (0.057) (0.076) (0.094)
π -0.706 -0.255 -0.317 7.27 -0.056 0.066 0.201
(0.304) (0.335) (0.403) (0.026) (0.115) (0.132) (0.146)
OECD 0.420 0.445
(0.157) (0.141)
𝜋 ∗ 𝑂𝐸𝐶𝐷 -1.839 -0.862 6.75 -1.080 -0.997
(0.589) (0.691) (0.009) (0.366) (0.353)
Africa -0.120 -0.131
(0.031) (0.033)
xt-1 0.000 -0.000
(0.000) (0.000)
Fertilityt-1 -0.031 -0.015
(0.018) (0.011)
N 954 954 943 954 954 943
F / 𝜒F 31.53 32.39 21.07 89.86 50.08 54.48
 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
F
F / 𝜒 – OECD 28.95 18.68 71.60
35 106.63 35
(0.000) (0.000) (0.000) (0.000)
F / 𝜒 F – Africa 56.49 59.42
(0.000) (0.000)
Hausman 8.82 10.40 4.61
(0.003) (0.006) (0.203)
Notes: Robust Standard Error in parenthesis below estimates, P-values below F, 𝜒 F and Hausman statistics.
Dependent variable 𝜋 ∗
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 7—PANEL ESTIMATION G ENERALIZED V IABILITY C ONDITION (𝜋=∗ )

F
Fixed Effects 𝜒opqrsBlt Random Effects

Cons. 0.828 0.847 0.997 1.17 0.540 0.516 0.584

(0.142) (0.129) (0.203) (0.557) (0.056) (0.075) (0.094)
π -0.670 -0.212 -0.285 7.47 -0.048 0.074 0.211
(0.304) (0.335) (0.403) (0.024) (0.114) (0.131) (0.145)
OECD 0.418 0.443
(0.157) (0.151)
𝜋 ∗ 𝑂𝐸𝐶𝐷 -1.870 -0.882 6.82 -1.073 -0.990
(0.589) (0.691) (0.009) (0.365) (0.353)
Africa -0.119 -0.127
(0.031) (0.033)
xt-1 -0.000 -0.000
(0.000) (0.000)
Fertilityt-1 -0.032 -0.017
(0.018) (0.011)
N 954 954 943 954 954 943
F / 𝜒F 30.17 32.38 21.33 92.32 49.83 55.10
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
F / 𝜒 F – OECD 28.43 18.58 75.07
35 112.33 35
(0.000) (0.000) (0.000) (0.000)
F / 𝜒 F – Africa 54.57 57.74
(0.000) (0.000)
Hausman 8.09 10.09 4.36
(0.005) (0.006) (0.226)
Notes: Robust Standard Error in parenthesis below estimates, P-values below F, 𝜒 F and Hausman statistics.
Dependent variable 𝜋=∗
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 8—SUMMARY STATISTICS 5 Y EAR A VERAGE

Observations Mean Std. Dev. Minimum Maximum VIF

𝜋∗ 1202 0.502 0.315 0 1
𝜋=∗ 1202 0.508 0.314 0 1
π 1083 0.464 0.125 0.148 0.858 1.41
OECD 1804 0.213 0.410 0 1 31.82
𝜋 ∗ 𝑂𝐸𝐶𝐷 1083 0.122 0.187 0 0.614 28.42
Africa 1804 0.287 0.452 0 1 1.81
 xt-1 1204 28108.43 28724.83 576.357 228467.6 2.38
Fertilityt-1 1194 3.836 1.950 0.855 8.437 3.81
Institution 1298 3.755 1.971 1 7 1.08
Open
t-1 t-1 1343 75.900 51.153 0.333 415.493 1.31
Schoolt-1 1389 5.735 3.261 0 13.424 3.95
Source: Author calculations. Extended Penn World Tables 6.0

TABLE 9—C ORRELATION C OEFFICIENTS

π* π OECD 𝜋 ∗ 𝑂𝐸𝐶𝐷 Africa xt-1 Fertili Institu Open School

𝜋* 1
π 0.025 1
OECD -0.004 -0.344 1
𝜋 ∗ 𝑂𝐸𝐶𝐷 -0.012 -0.274 0.979 1
Africa -0.143 0.051 -0.396 -0.388 1
xt-1 -0.034 0.012 0.574 0.563 -0.424 1
Fertility -0.094 0.112 -0.536 -0.520 0.652 -0.625 1
Instituti
t-1 -0.025 0.001 0.002 -0.011 -0.023 -0.095 0.051 1
ont-1 t-1
Open -0.037 0.105 -0.086 -0.080 -0.075 0.286 -0.244 -0.176 1
Schoolt- 0.063 -0.131 0.581 0.576 -0.590 0.670 -0.824 -0.140 0.248 1
1
Notes: Observations = 735
Source: Author calculations. Extended Penn World Tables 6.0, Freedom Index, World Development Indicators
 TABLE 10—PANEL ESTIMATION , R OBUSTNESS C HECK

Fixed Effects Random Effects

No OECD OECD No OECD OECD & Africa
π Max -0.014 -0.084 0.116 0.198
π Min -0.862 -0.276 0.027 0.049
π Average -0.434 -0.169 0.069 0.125
(0.424) (0.467) (0.120) (0.144)
F
𝜒opqrsBlt 27.27 16.76
(0.098) (0.606)
𝜋 ∗ 𝑂𝐸𝐶𝐷 Max -0.808 -0.580
𝜋 ∗ 𝑂𝐸𝐶𝐷 Min -1.342 -0.752
𝜋 ∗ 𝑂𝐸𝐶𝐷 Average -1.127 -0.670
(0.680) (0.357)
F
𝜒opqrsBlt 21.21
(0.325)
𝐹/𝜒 F  Max 23.079 27.202 86.094 52.004
𝐹/𝜒 F  Min 6.218 15.920 49.750 30.312
𝐹/𝜒 F  Average 11.753 21.101 70.088 43.548
% Rejected 100% 100% 100% 100%
𝐹/𝜒 F  Max (OECD) 27.435 44.665
𝐹/𝜒 F  Min (OECD) 18.316 26.667
𝐹/𝜒 F  Average (OECD) 21.773 34.105
% Rejected (OECD) 100% 100%
𝐹/𝜒 F  Max (African) 34.115
𝐹/𝜒 F  Min (African) 16.196
𝐹/𝜒 F  Average (African) 23.493
% Rejected (African) 100%
Notes: Average Robust Standard Error in parenthesis below average estimates. P-values below 𝜒 F statistics for
equal cross model coefficients for 𝜋 and 𝜋 ∗ 𝑂𝐸𝐶𝐷. Complete observations only, N=735
Source: Author calculations. Extended Penn World Tables 6.0, Freedom index, World Development Indicators,
Barro-Lee Education Attainment
 VIII. Figures

FIGURE 1. UNCODED VIABILITY CONDITION SCATTER PLOT.

Notes: 5 Year Average values from 1967-2014 for each country, uncoded.
 FIGURE 2. VIABILITY CONDITION SCATTER PLOT, ALL.

Notes: Average values from 1967-2014 for each country, top- and bottom-coded
 FIGURE 3. VIABILITY CONDITION SCATTER PLOT, OECD.

Notes: Average values from 1967-2014 for each country, top- and bottom-coded
 FIGURE 4. VIABILITY CONDITION SCATTER PLOT, AFRICA.

Notes: Average values from 1967-2014 for each country, top- and bottom-coded