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On the optimal labor income share

Author

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  • Growiec, Jakub
  • PeterMcAdam
  • Muck, Jakub

Abstract

Labor’s share of income has attracted interest in recent years reflecting its apparent decline. These falls, witnessed across many countries, are usually deemed undesirable. Any such assertion, however, begs the question of what is the socially optimal labor share. We address this question using a micro-founded endogenous growth model calibrated on US data. We find that in our central calibration the socially optimal labor share is 17% (11 pp) above the decentralized equilibrium, calibrated to match the average observed in history. We also study the dependence of both long-run growth equilibria on model parameters and relate our results to Piketty’s “laws of Capitalism”. Finally, we demonstrate that cyclical movements in factor income shares are socially optimal and that the decentralized equilibrium typically does not generate excess volatility. JEL Classification: O33, O41

Suggested Citation

  • Growiec, Jakub & PeterMcAdam & Muck, Jakub, 2018. "On the optimal labor income share," Working Paper Series 2142, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182142
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    More about this item

    Keywords

    decentralized allocation; endogenous growth; factor augmenting endogenous technical change; labor income share; social optimum;

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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