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If $L$ represents the amount of labour in the Solow-Swan production function:

$Y/L$=$f(K/L)$

how can $Y/L$ equal 'per-capita income' if $K/L$ is the capital/labour ratio?

I thought per-capita income was income divided by the entire population.

Thanks.

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  • $\begingroup$ A usual tactic is to "normalize the amount of labor available to each individual as equal to unity". This is done because in the benchmark versions of these models there is no choice regarding labor, so it really is an unimportant variable in the model. $\endgroup$ – Alecos Papadopoulos May 28 '15 at 0:07
  • $\begingroup$ So, I emailed my lecturer, and he told me that the Solow-Swan model assumes full employment, so L is workers and population. $\endgroup$ – simba May 29 '15 at 12:25
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    $\begingroup$ Full employment comes from the assumption of a totally inelastic supply of labor at the maximum possible per individual, irrespective of the wage ("each individual offers one unit of labor inelastically"). But you still need to normalize the available amount of labor per individual to unity ("each individual offers one unit of labor inelastically"), in order to obtain "amount of labor L equals the population(headcount)". $\endgroup$ – Alecos Papadopoulos May 29 '15 at 12:42
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$L$ is labor, which is equal to population in Solow-Swan model. Solow did not actually believe the workforce and population had the same size, but what's important is that labor is supposed to be in direct relationship with population i.e. there is a number w between 0 and 1 such that

$L = w *$ population

Direct proportionality between population and workforce is one of the assumptions of the Solow model.

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