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Labor share and income distribution: Size of the cake or the cake portion?

Author

Listed:
  • Anelí Bongers

    (Department of Economics, University of Málaga, Spain)

  • Benedetto Molinari

    (Department of Economics, University of Málaga, Spain; Rimini Centre for Economic Analysis)

  • José L. Torres

    (Department of Economics, University of Málaga, Spain)

Abstract

This paper analyzes the macroeconomic and distributional effects of declining labor share as observed during the last decades. We use a neoclassical general equilibrium model with two types of households, workers and capitalists, endowed with a CES production function, in which the distributional parameter matches labor share. This implies the existence of a technological nexus between the observed labor share and the distributional parameter of the CES function. We explore that technological nexus and show that both capitalists' and workers' income increase as labor income declines depending on the elasticity of substitution between capital and labor. The effect of labor share changes on income distribution does not depend on the elasticity of substitution, and hence, relative income and relative consumption decrease for workers, increasing inequality. When capital depreciation rate is taken into account, the decline in labor share has a limited impact on the functional distribution of net income.

Suggested Citation

  • Anelí Bongers & Benedetto Molinari & José L. Torres, 2021. "Labor share and income distribution: Size of the cake or the cake portion?," Working Paper series 21-06, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:21-06
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    References listed on IDEAS

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    More about this item

    Keywords

    Functional distribution of income; Labor share; Workers; Capitalists;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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