Decline In Labor Share Research Articles

Productive government investment and the labor share

A recent body of literature has sought to determine the causes of the global decline of the labor share. We study the role played by government investment—which has also fallen in many advanced economies over the past few decades—in the labor share decline. We first establish a theoretical link between government investment and the labor share using a general equilibrium macroeconomic model, where government capital enters the production function in a factor-augmenting fashion. Our analytic results show that a permanent cut to government investment causes a steady-state decline in the labor share if the elasticity of substitution between private capital and labor is less than one and public capital augments private capital. We then study the empirical relationship between these variables using two panel datasets covering 79 countries, both developing and developed, over the period 1970–2017. Using a system GMM estimator, we find a positive and statistically significant association between government investment and the labor share in advanced economies; for developing countries, however, we find no effect.

Who Killed the Phillips Curve? A Murder Mystery

Is the Phillips curve dead? If so, who killed it? Conventional wisdom has it that the sound monetary policy since the 1980s not only conquered the Great Inflation, but also buried the Phillips curve itself. This paper provides an alternative explanation: labor market policies that have eroded worker bargaining power might have been the source of the demise of the Phillips curve. We develop what we call the "Kaleckian Phillips curve", the slope of which is determined by the bargaining power of trade unions. We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence.

The Elusive Explanation for the Declining Labor Share

A vast literature seeks to measure and explain the apparent decline in the labor share in national income that has occurred in recent times in the United States and elsewhere. The culprits include technological change, increased globalization and the rise of China, the enhanced exercise of market power by large firms in concentrated product markets, the decline in unionization rates and the erosion in the bargaining power of workers in labor markets, and the changing composition of the workforce due to a slowdown in population growth and a rise in educational attaintment. We review this literature, with special emphasis on the pitfalls associated with using cross-sectional data to assess this phenomenon and the reasons why the body of papers collectively explains the phenomenon many times over.

The decline in capital-skill complementarity

We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Ríos-Rull and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good fit for the skill premium; however, it does not match the declining pattern in labor share in the last two decades. We modify the model to allow for a flexible technology structure and show that the degree of capital-skill complementarity is declining over time. The augmented model with time-varying capital-skill complementarity suggests explanations for the declining labor share.

Investment incentives and labor share: evidence from accelerated depreciation policy in China

ABSTRACT This paper studies the impact of Chinaʻs accelerated depreciation policy (ADP) that was enacted in 2014 on labor share. We explore a firm-level dataset from Chinaʻs industrial enterprise database and estimate the policy effects using a difference-in-differences framework. We find that the ADP apparently reduces the labor share of the treated firms compared to the control firms, which is a net effect jointly driven by the capital deepening and skill structure upgrading channels. Among these two channels, the former is dominant and has negative effects on labor share, while the latter is positively related to the labor share. We also demonstrate that the firms with less financial constraints experience a more profound capital deepening process and a larger decline in labor share after policy enactment. These results suggest that the widespread use of investment tax incentives may be one of the reasons for the decline in global labor share in recent years.

Bargaining power, structural change, and the falling U.S. labor share

Most explanations for the declining labor share focus on structural changes such as deindustrialization, globalization, financialization, market concentration, and technological change. We argue that these forces operate through a bargaining power channel and that the reduction in the labor share has been driven by lower bargaining power for workers. We first estimate the relationship between bargaining power and labors share of income using a bounds-testing approach and find a significant negative relationship. We then create novel indices of structural change and estimate regressions of the cost of job loss, generally finding that increases in structural change have both increased the cost of job loss and amplified its volatility over the business cycle. Our analysis therefore supports the hypothesis that the decline in the labor share is driven by decreased labor bargaining power and suggests that structural economic changes and weak economic performance in the U.S. have increased inequality.

Inter-Generational Conflict and the Declining Labor Share

Inter-Generational Conflict and the Declining Labor Share

Labor Share Decline and Intellectual Property Products Capital: A Different Measurement Perspective

Labor Share Decline and Intellectual Property Products Capital: A Different Measurement Perspective

Growth, automation, and the long-run share of labor

We study the long run implications of workplace automation induced by capital accumulation. We describe a minimal set of sufficient conditions for sustained growth, along with a declining labor share of income in the long run: (i) a basic asymmetry between physical and human capital; (ii) the technical possibility of automation in each sector; (ii) a self-replication condition on the production function for robot services; (iv) asymptotic homotheticity (more generally neutrality) of demand, and (v) a minimal degree of patience or intergenerational altruism among a fraction of households. However, the displacement of human labor is gradual, and absolute real wages could rise indefinitely. The results obtain in the absence of any technical progress; they extend to endogenous technical progress even if such progress is not biased ex ante in favor of automation.

Adjustment to trade opening: The case of labor share in India's manufacturing industry

While trade opening is generally welfare enhancing, it requires a reallocation of capital and labor across sectors and firms. The empirical evidence on how this reallocation works is still relatively thin. Our paper contributes to this literature by studying how the labor’s share of income adjusted due to trade liberalization in India’s formal manufacturing sector during the period 1998–99 to 2007–08. Our baseline model suggests that a fall in output tariffs led to an increase in the labor share while a fall in input tariffs brought about a decrease in labor share. However, once we control for factor and technology intensity of production, we find that this differential impact of tariff reduction on labor share aligns with these classifications. Tariff liberalization led to a decline in labor share in technology and capital-intensive sectors while in labor-intensive and low-tech sectors it brought about an increase. This suggests that following trade opening, demand for labor improved in labor-intensive and low-tech sectors but deteriorated in capital-intensive and high-tech sectors. India’s manufacturing bias towards the latter explains the overall decline in labor share in the post-reform period. Furthermore, we find that labor adjustment occurred more efficiently in states with flexible labor laws.

Technology and the Labour Share in Industrialised Economies: A Revisited Analysis

This paper revisits the discussion of the determinants of the declining labour share in industrialised countries. We select a panel of 20 OECD countries with the most advanced industrial capabilities and explore the effects of technological progress on the labour income share. We incorporate a full range of variables to cover the fundamental determinants. Our analysis extends previous studies by examining various proxies for technology which are significant drivers of the labour share. The paper expands the assessment by testing the labour share by skill level and shows that among the leading drivers of the declining labour share are the capital prices and ICT capital, driven by the effect of these variables on the labour share of low-skilled workers. Capital intensity, financial integration and trade globalisation shrink the aggregate labour share.

What Explains Labor’s Declining Share of Revenue in Major League Baseball?

Abstract: This study explores reasons for the declining share of revenue going to Major League Baseball players. Though the players’ union and team owners have proposed competing explanations, the phenomenon has not received any rigorous academic study. Economic theories for the similar decline of labor share in the macroeconomy provide possible explanations. The ability to estimate baseball players’ marginal revenue products through their performance offers a unique opportunity to examine the role of worker productivity in determining labor’s share of income in general. The analysis indicates that the returns to player performance have declined and that collective bargaining agreement terms that promote revenue sharing among teams appear to play a significant role. In addition, increased returns from new non-player revenue sources have lowered the share of league revenue going to players. Competition from substitute labor inputs and changes in returns to physical capital do not appear to be important factors.

The Neoclassical Growth Model and the Labor Share Decline.

The labor share may be declining in the data, but it is often assumed constant in neoclassical growth models (NGM). We assess the quantitative importance of this discrepancy by comparing alternative calibration approaches featuring constant and declining labor shares. We find little difference in model performance. Our results derive from strong general equilibrium effects: while a declining labor share mechanically lowers wage growth, the investment response pushes wages back up. Hence, different models deliver nearly identical paths of macro aggregates. Numerous robustness checks (including a CES production function, different time periods, and calculations of the labor share) reinforce the similarity of performance across model specifications. We conclude that the NGM with a constant labor share is still an appropriate choice to study many standard macro aggregates.

Rising Corporate Power and Declining Labor Share in the Era of Chicago School Antitrust

: Industrial concentration has led to rising profit shares, higher price markups, and a decline in business investment. In this article, we connect those phenomena to the rise of the Chicago School of Antitrust and its more lenient antitrust treatment of large corporations that parallels the decline in the labor share for U.S. workers. Our analysis of the U.S. manufacturing sector and components of the profit rate provides evidence for the rising profit shares and the slower capital accumulation in the highly concentrated sectors of U.S. manufacturing, and thus the laissez-faire bent of Chicago School antitrust toward corporate bigness during the period of declining labor shares should be recognized as another strong contributor to rising income inequality in the United States over this period.

The Micro-Level Anatomy of the Labor Share Decline*

AbstractThe labor share in U.S. manufacturing declined from 61% in 1967 to 41% in 2012. The labor share of the typical U.S. manufacturing establishment, in contrast, rose by over 3 percentage points during the same period. Using micro-level data, we document five salient facts: (i) since the 1980s, there has been a dramatic reallocation of value added toward the lower end of the labor share distribution; (ii) this aggregate reallocation is not due to entry/exit, to “superstars” growing faster, or to large establishments lowering their labor shares, but is instead due to units whose labor share fell as they grew in size; (iii) low labor share (LL) establishments benefit from high revenue labor productivity, not low wages; (iv) they also enjoy a product price premium relative to their peers; and (v) they have only temporarily lower labor shares that rebound after five to eight years. This transient pattern has become more pronounced over time, and the dynamics of value added and employment are increasingly disconnected. Taken together, we interpret these facts as pointing to a significant role for demand-side forces.

Rethinking growth and inequality in the US: what is the role of measurement of GDP?

ABSTRACT Five sectors have increased their contribution to US GDP growth since 1973: professional-business services (PBS), finance, information, healthcare, and arts-entertainment. Among these, however, finance, healthcare, and PBS have questionable foundations for being regarded as final consumption of households. Contra published National Income and Product Accounts, treating expenditures on finance, healthcare, and PBS as intermediate consumption reveals a significantly different picture of US economic growth, including i) a deeper slowdown of real output growth since 1973; ii) a more moderate rise in consumption share since 1980; and iii) a sharper decline in labor share, defined as the compensation of employees over GDP since 1985. Through a measurement approach, this paper thus contributes to the literature on secular stagnation and rising inequality in the United States.

A dynamic theory of the declining aggregated labor income share: Intangible capital vs. tangible capital

Reports of the literature documenting the declining labor share of income have increased greatly in the past few years, which is opposed to one of the famous “Kaldor's stylized facts” of growth. The declining labor income share has been observed since the 1980s in a number of countries, and especially in the United States. Recent studies have revealed the following five major driving forces of the declining labor share: (i) supercycles and boom-busts, (ii) rising and faster depreciation, (iii) superstar effects and consolidation, (iv) capital substitution and automation, and (v) globalization and labor bargaining power. We set up a two-sector optimal growth model with the R&D intermediate sectors producing intangible capital. By integrating driving factors (ii) through (iv) above into the model, we demonstrate the long-run decline of the aggregated labor income share.

The Rise of Pass-Throughs and the Decline of the Labor Share

This paper studies the coevolution of the fall in the US corporate sector labor share and the rise of business activity in tax-preferred, pass-through form. Reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one third of the decline in the corporate sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, leaving a larger role for the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares.

Optimal Taxation of Capital in the Presence of Declining Labor Share

We analyze the implications of the decline in labor’s share in national income for optimal Ramsey taxation. It is optimal to accompany the decline in labor share by raising capital taxes only if the labor share is falling because of a decline in competition or other mechanisms that raise the share of pure profits. This result holds under various alternative institutional arrangements that are relevant for optimal taxation of capital income. A quantitative application to the U.S. economy shows that soaring profit shares since the 1980's can justify a significantly increasing path of capital income taxes.

The Determinants and Welfare Implications of Labor Share

The decline in labor share is recognized as a global phenomenon. Concerns have been raised that this trend will exacerbate the income inequality between business owners as capitalists and households as the labor suppliers, prompting a decline in household income and consumption, which are major driving forces for sustainable growth. Meanwhile, various policy measures have been introduced to raise the labor share, with the aim of correcting inequality and boosting growth. This study explores the determinants of labor share and analyzes the effects of these factors on the economy and social welfare, offering various interpretations and policy alternatives according to economic conditions.