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Can Capital Deepening Explain the Global Decline in Labor's Share?

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  • Andrew Glover

    (University of Texas)

  • Jacob Short

    (Bank of Canada)

Abstract

We estimate an aggregate elasticity of substitution between capital and labor near or below one, which implies that capital deepening cannot explain the global decline in labor's share. Our methodology derives from transition paths in the neo-classical growth model. The elasticity of substitution is identified from the cross-country correlation between trends in the labor share and a theoretically derived proxy for the rental rate of capital. Trends in labor's share and the rental rate are weakly correlated across countries, and inversely related in most samples. Previous cross-country estimates of this elasticity were substantially greater than one, which we show was largely due to omitted variable bias: earlier studies used investment prices alone to proxy for the rental rate, whereas the growth model relates rental rates to investment prices and consumption growth. (Copyright: Elsevier)

Suggested Citation

  • Andrew Glover & Jacob Short, 2020. "Can Capital Deepening Explain the Global Decline in Labor's Share?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 35-53, January.
    • Handle: RePEc:red:issued:18-126
    DOI: 10.1016/j.red.2019.04.007
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    2. Reshef, Ariell & Santoni, Gianluca, 2023. "Are your labor shares set in Beijing? The view through the lens of global value chains," European Economic Review, Elsevier, vol. 155(C).
    3. Barış Kaymak & Immo Schott, 2023. "Corporate Tax Cuts and the Decline in the Manufacturing Labor Share," Econometrica, Econometric Society, vol. 91(6), pages 2371-2408, November.
    4. Arif, Imran, 2021. "Productive knowledge, economic sophistication, and labor share," World Development, Elsevier, vol. 139(C).
    5. Vahagn Jerbashian, 2022. "On the Elasticity of Substitution between Labor and ICT and IP Capital and Traditional Capital," CESifo Working Paper Series 9989, CESifo.
    6. d’Albis, Hippolyte & Boubtane, Ekrame & Coulibaly, Dramane, 2021. "Demographic changes and the labor income share," European Economic Review, Elsevier, vol. 131(C).
    7. Matteo G. Richiardi & Luis Valenzuela, 2024. "Firm heterogeneity and the aggregate labour share," LABOUR, CEIS, vol. 38(1), pages 66-101, March.
    8. Andrew Glover & Jacob Short, 2020. "Demographic Origins of the Decline in Labor's Share," BIS Working Papers 874, Bank for International Settlements.
    9. Baek, Seungjin & Jeong, Deokjae, 2023. "Factors Influencing Labor Share: Automation, Task Innovation, and Elasticity of Substitution," MPRA Paper 118730, University Library of Munich, Germany.
    10. Sebastian Gechert & Tomas Havranek & Zuzana Irsova & Dominika Kolcunova, 2022. "Measuring Capital-Labor Substitution: The Importance of Method Choices and Publication Bias," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 55-82, July.
    11. Benjamin Bridgman & Ryan Greenaway‐McGrevy, 2022. "Public enterprise and the rise and fall of labor share," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 320-350, January.
    12. Burkhard Heer & Andreas Irmen & Bernd Süssmuth, 2023. "Explaining the decline in the US labor share: taxation and automation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1481-1528, December.
    13. Song, Eunbi, 2021. "What drives labor share change? Evidence from Korean industries," Economic Modelling, Elsevier, vol. 94(C), pages 370-385.
    14. Gonzalez, Ignacio & Trivin, Pedro, 2019. "The Global Rise of Asset Prices and the Decline of the Labor Share," MPRA Paper 94587, University Library of Munich, Germany.
    15. Süssmuth, Bernd & Irmen, Andreas & Heer, Burkhard, 2020. "Taxation, Automation Capital, and the Functional Income Distribution," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224572, Verein für Socialpolitik / German Economic Association.
    16. Alex Chernoff & Gabriela Galassi, 2023. "Digitalization: Labour Markets," Discussion Papers 2023-16, Bank of Canada.
    17. Kausik, B.N., 2023. "Cognitive Aging and Labor Share," MPRA Paper 118406, University Library of Munich, Germany.
    18. Kostarakos, Ilias, 2020. "Determinants of the (non-Housing) Labour Income Share in the EU," Papers WP693, Economic and Social Research Institute (ESRI).
    19. Berthold Herrendorf & Richard Rogerson & Akos Valentinyi, 2019. "Growth and the Kaldor Facts," Review, Federal Reserve Bank of St. Louis, vol. 101(4), pages 259-276.
    20. Pengfei Zhang, 2023. "Endogenous capital-augmenting R&D, intersectoral labor reallocation, and the movement of the labor share," Journal of Economics, Springer, vol. 140(1), pages 1-36, September.
    21. Xiao, De & Yu, Fan & Guo, Chenhao, 2023. "The impact of China's pilot carbon ETS on the labor income share: Based on an empirical method of combining PSM with staggered DID," Energy Economics, Elsevier, vol. 124(C).
    22. R. Dixon & G.C. Lim, 2017. "Labor's Share, the Firm's Market Power and TFP," Melbourne Institute Working Paper Series wp2017n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    23. Li, Bing & Liu, Chang & Sun, Stephen Teng, 2021. "Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China," Journal of Development Economics, Elsevier, vol. 150(C).
    24. Sebastian Gechert & Tomas Havranek & Zuzana Irsova & Dominika Kolcunova, 2022. "Measuring Capital-Labor Substitution: The Importance of Method Choices and Publication Bias," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 55-82, July.

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    More about this item

    Keywords

    Labor-share; Capital-labor substitutability;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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