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Declining Labor Shares and the Global Rise of Corporate Saving

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Listed:
  • Loukas Karabarbounis
  • Brent Neiman

Abstract

The stability of the labor share is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined over the last 30 years. This decline was associated with a significant increase in corporate saving, generally the largest component of national saving. We relate the labor share to corporate saving empirically and theoretically using a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and that corporate saving affects macroeconomic allocations. We argue that it is important to study the labor share and corporate saving jointly, and offer a unified explanation for their trends. A global decline in the cost of capital beginning around 1980 induced firms to shift away from labor and toward capital, financed in part with an increase in corporate saving.

Suggested Citation

  • Loukas Karabarbounis & Brent Neiman, 2012. "Declining Labor Shares and the Global Rise of Corporate Saving," NBER Working Papers 18154, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18154
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    References listed on IDEAS

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    1. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
    2. Bacchetta Philippe & Benhima Kenza, 2010. "The Demand for Liquid Assets, Corporate Saving, and Global Imbalances," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 10.12, Université de Lausanne, Faculté des HEC, DEEP.
    3. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2007), pages 1-53, August.
    4. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    5. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Tamim Bayoumi & Hui Tong & Shang-Jin Wei, 2012. "The Chinese Corporate Savings Puzzle: A Firm-level Cross-Country Perspective," NBER Chapters,in: Capitalizing China, pages 283-308 National Bureau of Economic Research, Inc.
    7. Roc Armenter & Viktoria Hnatkovska, 2011. "The macroeconomics of firms' savings," Working Papers 12-1, Federal Reserve Bank of Philadelphia.
    8. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
    9. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
    10. Francisco Rodriguez & Arjun Jayadev, 2010. "The Declining Labor Share of Income," Human Development Research Papers (2009 to present) HDRP-2010-36, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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