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Recent Declines in Labor's Share in U.S. Income: A Preliminary Neoclassical Account

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  • Lawrence Robert Z.

    (Harvard University)

Abstract

As shown in the 1930s by Hicks and Robinson the elasticity of substitution (s) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of s is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that s is greater than one and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, laboraugmenting technical change in the US has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that s is less than 1, these declines in the effective capital ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation would raise labor's share in income.

Suggested Citation

  • Lawrence Robert Z., 2015. "Recent Declines in Labor's Share in U.S. Income: A Preliminary Neoclassical Account," Working Paper Series rwp15-034, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp15-034
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    Cited by:

    1. 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.
    2. Autor, David & Dorn, David & Katz, Lawrence F. & Patterson, Christina & Van Reenen, John, 2017. "The fall of the Labor share and the rise of superstar firms," LSE Research Online Documents on Economics 83616, London School of Economics and Political Science, LSE Library.
    3. repec:eso:journl:v:48:y:2017:i:3:p:231-251 is not listed on IDEAS
    4. Jacob Short & Andrew Glover, 2016. "Accounting for Income Shares: The Changing Demographic Distribution of Earnings and the Decline in Labor Share," 2016 Meeting Papers 1631, Society for Economic Dynamics.
    5. Jacob Short & Andrew Glover, 2017. "The Age-Distribution of Earnings and the Decline in Labor's Share," 2017 Meeting Papers 1369, Society for Economic Dynamics.
    6. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.

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