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Will the true labor share stand up?

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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. repec:eee:dyncon:v:87:y:2018:i:c:p:74-93 is not listed on IDEAS
    2. 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.
    3. 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.
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    5. 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.
    6. 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.
    7. 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.
    8. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    9. Gagnon, Edith & Khan, Hashmat, 2005. "New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area," European Economic Review, Elsevier, vol. 49(6), pages 1571-1602, August.
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    11. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(04), pages 695-727, June.
    12. 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.
    13. Born, Benjamin & Pfeifer, Johannes, 2014. "Policy risk and the business cycle," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 68-85.
    14. 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.
    15. 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.
    16. 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.
    17. 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.
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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. Brad Sturgill & Hernando Zuleta, 2016. "Variable Factor Shares and the Index Number Problem: A Generalization," DOCUMENTOS CEDE 015038, UNIVERSIDAD DE LOS ANDES-CEDE.
    4. McAdam, Peter & Willman, Alpo, 2018. "Unraveling The Skill Premium," Macroeconomic Dynamics, Cambridge University Press, vol. 22(01), pages 33-62, January.
    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. repec:ecb:ecbwps:20141800 is not listed on IDEAS
    7. 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.
    8. 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.
    9. Thorsten Drautzburg & Jesús Fernández-Villaverde & Pablo Guerrón-Quintana, 2017. "Political Distribution Risk and Aggregate Fluctuations," NBER Working Papers 23647, National Bureau of Economic Research, Inc.
    10. 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.
    11. Cristiano Cantore & Filippo Ferroni & Miguel A. Leon-Ledesma, 2018. "The Missing Link: Monetary Policy and The Labor Share," Studies in Economics 1808, School of Economics, University of Kent.

    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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