IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/19-3.html

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

Author

Listed:
  • Andrew Glover
  • Jacob Short

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 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 partly 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.

Suggested Citation

  • Andrew Glover & Jacob Short, 2019. "Can Capital Deepening Explain the Global Decline in Labor’s Share?," Staff Working Papers 19-3, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-3
    DOI: 10.34989/swp-2019-3
    as

    Download full text from publisher

    File URL: https://doi.org/10.34989/swp-2019-3
    File Function: Abstract
    Download Restriction: no
    File URL: https://www.bankofcanada.ca/wp-content/uploads/2019/01/swp2019-3.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.34989/swp-2019-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bridgman, Benjamin, 2018. "Is Labor'S Loss Capital'S Gain? Gross Versus Net Labor Shares," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 2070-2087, December.
    2. David Autor & David Dorn & Lawrence F. Katz & Christina Patterson & John Van Reenen, 2017. "Concentrating on the Fall of the Labor Share," American Economic Review, American Economic Association, vol. 107(5), pages 180-185, May.
    3. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "The productivity slowdown and the declining labor share: a neoclassical exploration," CEP Discussion Papers dp1504, Centre for Economic Performance, LSE.
    4. 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.
    5. Matthias Kehrig & Nicolas Vincent, 2021. "The Micro-Level Anatomy of the Labor Share Decline," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1031-1087.
    6. Ezra Oberfield & Devesh Raval, 2021. "Micro Data and Macro Technology," Econometrica, Econometric Society, vol. 89(2), pages 703-732, March.
    7. Nicolas Vincent & Matthias Kehrig, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," 2017 Meeting Papers 739, Society for Economic Dynamics.
    8. 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.
    9. Dongya Koh & Raül Santaeulàlia‐Llopis & Yu Zheng, 2020. "Labor Share Decline and Intellectual Property Products Capital," Econometrica, Econometric Society, vol. 88(6), pages 2609-2628, November.
    10. Michael Elsby & Bart Hobijn & Ayseful Sahin, 2013. "The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 1-63.
    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. 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.
    13. Backus, David & Henriksen, Espen & Storesletten, Kjetil, 2008. "Taxes and the global allocation of capital," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 48-61, January.
    14. 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.
    15. Matthias Kehrig & Nicolas Vincent, 0. "The Micro-Level Anatomy of the Labor Share Decline," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 1031-1087.
    16. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    17. repec:hal:pseose:halshs-01109372 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    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. Loukas Karabarbounis & Brent Neiman, 2019. "Accounting for Factorless Income," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 167-228.
    2. vom Lehn, Christian, 2018. "Understanding the decline in the U.S. labor share: Evidence from occupational tasks," European Economic Review, Elsevier, vol. 108(C), pages 191-220.
    3. Bellocchi, Alessandro & Saraceno, Francesco & Travaglini, Giuseppe, 2025. "Closing the productivity–wage gap in the European Union: The role of the labor share," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 689-702.
    4. Daisuke ADACHI & Yukiko SAITO, 2020. "Multinational Production and Labor Share," Discussion papers 20012, Research Institute of Economy, Trade and Industry (RIETI).
    5. Emilien Gouin-Bonenfant, 2018. "Productivity Dispersion, Between-firm Competition and the Labor Share," 2018 Meeting Papers 1171, Society for Economic Dynamics.
    6. Song, Eunbi, 2021. "What drives labor share change? Evidence from Korean industries," Economic Modelling, Elsevier, vol. 94(C), pages 370-385.
    7. Saumik Paul & Yoko Oishi, 2018. "A Primer on the Drivers of Labor Income Share," Working Papers id:12948, eSocialSciences.
    8. 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.
    9. Clemens Struck & Adnan Velic, 2017. "Automation, New Technology, and Non-Homothetic Preferences," Trinity Economics Papers tep1217, Trinity College Dublin, Department of Economics.
    10. Musa Orak, 2017. "Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income," International Finance Discussion Papers 1200, Board of Governors of the Federal Reserve System (U.S.).
    11. Jose Barrales‐Ruiz & Ivan Mendieta‐Muñoz & Codrina Rada & Daniele Tavani & Rudiger von Arnim, 2022. "The distributive cycle: Evidence and current debates," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 468-503, April.
    12. Andrew Glover & Jacob Short, 2020. "Demographic Origins of the Decline in Labor's Share," BIS Working Papers 874, Bank for International Settlements.
    13. repec:spo:wpecon:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    14. German Gutierrez, 2018. "Investigating Global Labor and Pro t Shares," 2018 Meeting Papers 165, Society for Economic Dynamics.
    15. Fernando del Río & Francisco‐Xavier Lores, 2023. "Accounting for the role of investment frictions in recessions," Economica, London School of Economics and Political Science, vol. 90(360), pages 1089-1118, October.
    16. Francesca Crucitti & Lorenza Rossi, 2022. "Labor Share Decline and Productivity Slowdown: A Micro-Macro Analysis," Working Papers 350577481, Lancaster University Management School, Economics Department.
    17. Reshef, Ariell & Santoni, Gianluca, 2023. "Are your labor shares set in Beijing? The view through the lens of global value chains," European Economic Review, Elsevier, vol. 155(C).
    18. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    19. Jose Barrales-Ruiz, Ivan Mendieta-Muñoz, Codrina Rada, Daniele Tavani, Rudiger von Arnim, 2020. "The distributive cycle: Evidence and current debates," Working Paper Series, Department of Economics, University of Utah 2020_07, University of Utah, Department of Economics.
    20. 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.
    21. Guschanski, Alexander & Onaran, Özlem, 2018. "The labour share and financialisation: Evidence from publicly listed firms," Greenwich Papers in Political Economy 19371, University of Greenwich, Greenwich Political Economy Research Centre.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:bca:bocawp:19-3. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    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.