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On the optimal labor income share

Author

Listed:
  • Jakub Growiec

    (Narodowy Bank Polski)

  • Peter McAdam

    (European Central Bank)

  • Jakub Mućk

    (Narodowy Bank Polski)

Abstract

Labor’s share of income has attracted interest in recent years reflecting its apparent protracted 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.

Suggested Citation

  • Jakub Growiec & Peter McAdam & Jakub Mućk, 2019. "On the optimal labor income share," NBP Working Papers 311, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:311
    Note: We gratefully acknowledge support from the Polish National Science Center (Narodowe Centrum Nauki) under the grant Opus 3 No. 2012/05/B/HS4/02236, and the comments of seminar and workshop participants.
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    References listed on IDEAS

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    More about this item

    Keywords

    Labor income share; Endogenous growth; Factor augmenting endogenous technical change; Social optimum; Decentralized allocation.;
    All these keywords.

    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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