IDEAS home Printed from https://ideas.repec.org/a/ijc/ijcjou/y2021q4a8.html
   My bibliography  Save this article

On the Optimal Labor Income Share

Author

Listed:
  • Jakub Growiec

    (SGH Warsaw School of Economics and Narodowy Bank Polski)

  • Peter McAdam

    (European Central Bank)

  • Jakub Mućk

    (SGH Warsaw School of Economics and Narodowy Bank Polski)

Abstract

Labor's income share has attracted interest reflecting its decline. But, from an efficiency standpoint, can we say what share would hold in the social optimum? We address this question using a microfounded endogenous growth model calibrated on U.S. data. In our baseline case the socially optimal labor share is 17 percent (11 percentage points) above the decentralized (historical) equilibrium. This wedge reflects the presence of externalities in R&D in the decentralized equilibrium, whose importance is conditioned by the degree of factor substitutability. We also study the dependence of both long-run growth equilibriums on different model parameterizations and relate our results to Piketty's "Laws of Capitalism."

Suggested Citation

  • Jakub Growiec & Peter McAdam & Jakub Mućk, 2021. "On the Optimal Labor Income Share," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-52, October.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:4:a:8
    as

    Download full text from publisher

    File URL: http://www.ijcb.org/journal/ijcb21q4a8.pdf
    Download Restriction: no
    File URL: http://www.ijcb.org/journal/ijcb21q4a8.htm
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Berthold Herrendorf & Christopher Herrington & Ákos Valentinyi, 2015. "Sectoral Technology and Structural Transformation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 104-133, October.
    2. Nir Jaimovich & Henry E. Siu, 2020. "Job Polarization and Jobless Recoveries," The Review of Economics and Statistics, MIT Press, vol. 102(1), pages 129-147, March.
    3. Growiec, Jakub & McAdam, Peter & Mućk, Jakub, 2018. "Endogenous labor share cycles: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 74-93.
    4. Benassy, Jean-Pascal, 1998. "Is there always too little research in endogenous growth with expanding product variety?," European Economic Review, Elsevier, vol. 42(1), pages 61-69, January.
    5. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
    6. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
    7. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    8. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(1), pages 61-103.
    9. Growiec, Jakub & Mućk, Jakub, 2020. "Isoelastic Elasticity Of Substitution Production Functions," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1597-1634, October.
    10. Philippe Aghion & Ufuk Akcigit & Antonin Bergeaud & Richard Blundell & David Hemous, 2019. "Innovation and Top Income Inequality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 1-45.
    11. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(3), pages 1255-1310.
    12. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 691-702, June.
    13. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo.
    14. Laeven, Luc & McAdam, Peter & Popov, Alexander, 2023. "Credit shocks, employment protection, and growth:firm-level evidence from spain," Journal of Banking & Finance, Elsevier, vol. 152(C).
    15. Alvarez-Pelaez, Maria J. & Groth, Christian, 2005. "Too little or too much R&D?," European Economic Review, Elsevier, vol. 49(2), pages 437-456, February.
    16. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1991-2000, December.
    17. Leo Kaas & Leopold von Thadden, 2003. "Unemployment, Factor Substitution and Capital Formation," German Economic Review, Verein für Socialpolitik, vol. 4, pages 475-495, November.
    18. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    19. Matthew Rognlie, 2015. "Deciphering the Fall and Rise in the Net Capital Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 1-69.
    20. Palivos, Theodore & Karagiannis, Giannis, 2010. "The Elasticity Of Substitution As An Engine Of Growth," Macroeconomic Dynamics, Cambridge University Press, vol. 14(5), pages 617-628, November.
    21. Charles I. Jones & Jihee Kim, 2018. "A Schumpeterian Model of Top Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 126(5), pages 1785-1826.
    22. Chirinko, Robert S., 2002. "Corporate Taxation, Capital Formation,and the Substitution Elasticity Between Labor and Capital," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(2), pages 339-355, June.
    23. Jalava Jukka & Pohjola Matti & Ripatti Antti & Vilmunen Jouko, 2006. "Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-20, April.
    24. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    25. Matthew Rognlie, 2015. "Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 1-69.
    26. Azariadis, Costas, 1996. "The Economics of Poverty Traps: Part One: Complete Markets," Journal of Economic Growth, Springer, vol. 1(4), pages 449-496, December.
    27. Robert S. Chirinko & Debdulal Mallick, 2017. "The Substitution Elasticity, Factor Shares, and the Low-Frequency Panel Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 225-253, October.
    28. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 695-727, June.
    29. Argentino Pessoa, 2005. "“Ideas” driven growth: the OECD evidence," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 4(1), pages 46-67, April.
    30. Jakub Mućk & Peter McAdam & Jakub Growiec, 2018. "Will The “True” Labor Share Stand Up? An Applied Survey On Labor Share Measures," Journal of Economic Surveys, Wiley Blackwell, vol. 32(4), pages 961-984, September.
    31. Leo Kaas & Leopold Von Thadden, 2003. "Unemployment, Factor Substitution and Capital Formation," German Economic Review, Verein für Socialpolitik, vol. 4(4), pages 475-495, November.
    32. H. Uzawa, 1961. "Neutral Inventions and the Stability of Growth Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 28(2), pages 117-124.
    33. Erik Bengtsson, 2014. "Labour's share in twentieth-century Sweden: a reinterpretation," Scandinavian Economic History Review, Taylor & Francis Journals, vol. 62(3), pages 290-314, November.
    34. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 1-37, March.
    35. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    36. Rainer Klump & Harald Preissler, 2000. "CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 41-56, March.
    37. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
    38. Jakub Mućk, 2017. "Elasticity of substitution between labor and capital: robust evidence from developed economies," EcoMod2017 10433, EcoMod.
    39. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-425, July.
    40. Groth, Christian & Madsen, Jakob B., 2016. "Medium-term fluctuations and the “Great Ratios” of economic growth," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 149-176.
    41. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
    42. Andreas Irmen & Amer Tabakovic, 2020. "Factor Income Distribution And Endogenous Economic Growth: Piketty Meets Romer," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1342-1361, July.
    43. Atkinson, Anthony B., 2015. "Inequality: what can be done?," LSE Research Online Documents on Economics 101810, London School of Economics and Political Science, LSE Library.
    44. de La Grandville Olivier, 2012. "How Much Should a Nation Save? A New Answer," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(2), pages 1-36, April.
    45. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-1038, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Briones Mendoza, Xavier Fernando & Molero Oliva, Leobaldo Enrique & Calderón Zamora, Oscar Xavier, 2018. "La función de producción Cobb-Douglas en el Ecuador," Revista Tendencias, Universidad de Narino, vol. 19(2), pages 45-73, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Growiec, Jakub & McAdam, Peter & Mućk, Jakub, 2018. "Endogenous labor share cycles: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 74-93.
    2. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    3. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    4. Growiec, Jakub & Mućk, Jakub, 2020. "Isoelastic Elasticity Of Substitution Production Functions," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1597-1634, October.
    5. Jakub Growiec, 2019. "The Hardware-Software Model: A New Conceptual Framework of Production, R&D, and Growth with AI," KAE Working Papers 2019-042, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Charpe, Matthieu & Bridji, Slim & Mcadam, Peter, 2020. "Labor Share And Growth In The Long Run," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1720-1757, October.
    7. Jakub Mućk & Peter McAdam & Jakub Growiec, 2018. "Will The “True” Labor Share Stand Up? An Applied Survey On Labor Share Measures," Journal of Economic Surveys, Wiley Blackwell, vol. 32(4), pages 961-984, September.
    8. Song, Eunbi, 2021. "What drives labor share change? Evidence from Korean industries," Economic Modelling, Elsevier, vol. 94(C), pages 370-385.
    9. Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," Working Paper Series WP15-10, Peterson Institute for International Economics.
    10. Hector Sala & Pedro Trivín, 2018. "The effects of globalization and technology on the elasticity of substitution," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 617-647, August.
    11. T. Gries & R. Grundmann & I. Palnau & M. Redlin, 2017. "Innovations, growth and participation in advanced economies - a review of major concepts and findings," International Economics and Economic Policy, Springer, vol. 14(2), pages 293-351, April.
    12. Gregory Casey & Ryo Horii, 2019. "A Multi-factor Uzawa Growth Theorem and Endogenous Capital-Augmenting Technological Change," ISER Discussion Paper 1051, Institute of Social and Economic Research, Osaka University.
    13. 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.
    14. Knoblach, Michael & Rößler, Martin & Zwerschke, Patrick, 2016. "The Elasticity of Factor Substitution Between Capital and Labor in the U.S. Economy: A Meta-Regression Analysis," CEPIE Working Papers 03/16, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    15. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004. "Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach," Working Paper Series 367, European Central Bank.
    16. Irmen, Andreas, 2011. "Steady-state growth and the elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1215-1228, August.
    17. Lee, Jangyoun, 2021. "Behind rising inequality and falling growth," Journal of Macroeconomics, Elsevier, vol. 70(C).
    18. Clemens Struck & Adnan Velic, 2017. "To Augment Or Not To Augment? A Conjecture On Asymmetric Technical Change," Trinity Economics Papers tep0117, Trinity College Dublin, Department of Economics.
    19. Cantore, Cristiano & Levine, Paul & Pearlman, Joseph & Yang, Bo, 2015. "CES technology and business cycle fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 133-151.
    20. Manuel A. Gómez, 2020. "Factor substitution, long‐run growth, and speed of convergence in the one‐sector convex endogenous‐growth model," Metroeconomica, Wiley Blackwell, vol. 71(1), pages 2-21, February.

    More about this item

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2021:q:4:a:8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bank for International Settlements (email available below). General contact details of provider: https://www.ijcb.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.