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

Author

Listed:
  • 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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    References listed on IDEAS

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    Keywords

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    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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