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Will the true labor share stand up?

Author

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  • McAdam, Peter
  • Muck, Jakub
  • Growiec, Jakub

Abstract

We document the consequences of ambiguity in the empirical definition of the macroeconomic labor share. Depending on its definition, the properties of short-run fluctuations, medium-run swings, and long-run stochastic trends of the labor share may vary substantially. Based on a range of historical US time series, we carry out a systematic exploration of discrepancies between the alternative labor share definitions in terms of the observed stochastic trends, shares of short-, medium- and long-run variation in total volatility of the series, degree of persistence, mean-reversion properties, and susceptibility to structural breaks. We conclude that while short-run properties of the labor shares (represented by cyclical variation below 8 years) are relatively consistent across all definitions, their medium-run swings (8-50 years) and long-run trends ( 50 years) diverge substantially. As important applications, we document the implications of our findings for growth accounting, the identification of short-run responses of the labor share to technology shocks and for estimating inflation. JEL Classification: C82, E25, E32

Suggested Citation

  • McAdam, Peter & Muck, Jakub & Growiec, Jakub, 2015. "Will the true labor share stand up?," Working Paper Series 1806, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20151806
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1806.en.pdf
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    References listed on IDEAS

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    1. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2012. "Factor shares, the price markup, and the elasticity of substitution between capital and labor," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 181-198.
    2. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
    3. George Kapetanios & Yongcheol Shin, 2003. "GLS Detrending-Based Unit Root Tests in Nonlinear STAR and SETAR Frameworks," ESE Discussion Papers 108, Edinburgh School of Economics, University of Edinburgh.
    4. Cristiano Cantore & Miguel León-Ledesma & Peter McAdam & Alpo Willman, 2014. "Shocking Stuff: Technology, Hours, And Factor Substitution," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 108-128, February.
    5. repec:eee:dyncon:v:87:y:2018:i:c:p:74-93 is not listed on IDEAS
    6. 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.
    7. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    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. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    10. 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.
    11. Born, Benjamin & Pfeifer, Johannes, 2014. "Policy risk and the business cycle," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 68-85.
    12. Miguel A. Leon-Ledesma & Mathan Satchi, 2015. "Appropriate Technology and the Labour Share," Studies in Economics 1505, School of Economics, University of Kent, revised Nov 2016.
    13. 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.
    14. Jakub Growiec, 2012. "Determinants of the Labor Share," Eastern European Economics, Taylor & Francis Journals, vol. 50(5), pages 23-65, September.
    15. 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.
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    Citations

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    Cited by:

    1. Jakub Growiec & Jakub Muck, 2015. "Isoelastic Elasticity of Substitution Production Functions," Discussion Papers 15-13, University of Copenhagen. Department of Economics.
    2. Hernando Zuleta, 2015. "Getting Growth Accounting Right," DOCUMENTOS CEDE 013814, UNIVERSIDAD DE LOS ANDES-CEDE.
    3. McAdam, Peter & Willman, Alpo, 2018. "Unraveling The Skill Premium," Macroeconomic Dynamics, Cambridge University Press, vol. 22(01), pages 33-62, January.
    4. repec:ecb:ecbwps:20141800 is not listed on IDEAS
    5. 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.
    6. Jakub Growiec & Peter McAdam & Jakub Muck, 2018. "On the Optimal Labor Income Share," Working Papers 2018-031, Warsaw School of Economics, Collegium of Economic Analysis.
    7. Marcin Grela & Aleksandra Majchrowska & Tomasz Michałek & Jakub Mućk & Agnieszka Stążka-Gawrysiak & Grzegorz Tchorek & Marcin Wagner, 2017. "Is Central and Eastern Europe converging towards the EU-15?," NBP Working Papers 264, Narodowy Bank Polski, Economic Research Department.
    8. Drautzburg, Thorsten & Fern�ndez-Villaverde, Jes�s & Guerron-Quintana, Pablo A., 2017. "Political Distribution Risk and Aggregate Fluctuations," CEPR Discussion Papers 12187, C.E.P.R. Discussion Papers.
    9. Brad Sturgill & Hernando Zuleta, 2016. "Variable Factor Shares and the Index Number Problem: A Generalization," DOCUMENTOS CEDE 015038, UNIVERSIDAD DE LOS ANDES-CEDE.
    10. Roberto Torrini, 2015. "Labour, Profit and Housing Rent Shares in Italian GDP: Long-Run Trends and Recent Patterns," Politica economica, Società editrice il Mulino, issue 3, pages 275-314.

    More about this item

    Keywords

    labor share; mean reversion; persistence; spectral analysis; structural breaks;

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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