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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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    File URL: http://dx.doi.org/10.1016/j.red.2019.04.007
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    References listed on IDEAS

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    Cited by:

    1. Song, Eunbi, 2021. "What drives labor share change? Evidence from Korean industries," Economic Modelling, Elsevier, vol. 94(C), pages 370-385.
    2. d’Albis, Hippolyte & Boubtane, Ekrame & Coulibaly, Dramane, 2021. "Demographic changes and the labor income share," European Economic Review, Elsevier, vol. 131(C).
    3. Andrew Glover & Jacob Short, 2020. "Demographic Origins of the Decline in Labor's Share," BIS Working Papers 874, Bank for International Settlements.
    4. Arif, Imran, 2021. "Productive knowledge, economic sophistication, and labor share," World Development, Elsevier, vol. 139(C).
    5. Matteo Richiardi & Luis Valenzuela, 2019. "Firm Heterogeneity and the Aggregate Labour Share," LABORatorio R. Revelli Working Papers Series 166, LABORatorio R. Revelli, Centre for Employment Studies.
    6. 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.
    7. 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.
    8. Kostarakos, Ilias, 2020. "Determinants of the (non-Housing) Labour Income Share in the EU," Papers WP693, Economic and Social Research Institute (ESRI).
    9. 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.
    10. Burkhard Heer & Andreas Irmen & Bernd Süssmuth, 2020. "Explaining the Decline in the US Labor Share: Taxation and Automation," CREA Discussion Paper Series 20-20, Center for Research in Economic Analysis, University of Luxembourg.
    11. 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.

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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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