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Explaining the Decline in the US Labor Share: Taxation and Automation

Author

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  • Burkhard Heer

    (University of Augsburg, D)

  • Andreas Irmen

    (Department of Economics and Management, Université du Luxembourg)

  • Bernd Süssmuth

    (University of Leipzig, D)

Abstract

This study provides evidence for the US that the secular decline in the labor share is not only explained by technical change or globalization, but also by the dynamics of factor taxation, automation capital, and population growth. First, we empirically find indications of co-integration for the 1974-2008 period. Permanent effects on factor shares emanate from relative factor taxation. The latter also have a lasting effect on the use of robots. Variance decompositions reveal that taxing contributes to changes in the two income shares and in automation capital. Second, we analyse and calibrate a neoclassical growth model extended to include factor taxation, automation capital, and capital adjustment costs. The model is able to replicate the dynamics of the observed functional income distribution in the US during the 1965-2015 period. Counterfactual experiments suggest that the fall in the labor share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.

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  • Burkhard Heer & Andreas Irmen & Bernd Süssmuth, 2020. "Explaining the Decline in the US Labor Share: Taxation and Automation," DEM Discussion Paper Series 20-20, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:20-20
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    1. Barrero, José María & Bloom, Nicholas & Davis, Steven J. & Meyer, Brent & Mihaylov, Emil, 2022. "The Shift to Remote Work Lessens Wage-Growth Pressures," IZA Discussion Papers 15385, Institute of Labor Economics (IZA).
    2. 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.

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    More about this item

    Keywords

    Functional income distribution; labor income share; income taxes; automation capital; demography; growth.;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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