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Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

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  • Robert Z. Lawrence

Abstract

As shown in the 1930s by Hicks and Robinson the elasticity of substitution (`sigma`) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of `sigma` 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 `sigma` 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, labor-augmenting 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 σ 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.

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  • Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," NBER Working Papers 21296, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21296
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor's Declining Share: A Primer
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-06-05 17:43:02

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    1. repec:beo:journl:v:62:y:2017:i:215:p:53-80 is not listed on IDEAS
    2. Gregory Thwaites, 2014. "Why are real interest rates so low? Secular stagnation and the relative price of investment goods," Discussion Papers 1428, Centre for Macroeconomics (CFM).
    3. repec:eso:journl:v:48:y:2017:i:3:p:231-251 is not listed on IDEAS
    4. Matthias Kehrig & Nicolas Vincent, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," CESifo Working Paper Series 6454, CESifo Group Munich.
    5. Petre Caraiani, 2016. "Business Cycle Accounting for Peripheral European Economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(5), pages 468-496, November.
    6. 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.
    7. 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.
    8. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "Balanced Growth Despite Uzawa," American Economic Review, American Economic Association, vol. 107(4), pages 1293-1312, April.
    9. repec:kap:iecepo:v:14:y:2017:i:2:d:10.1007_s10368-016-0371-1 is not listed on IDEAS
    10. Alvarez-Cuadrado, Francisco & Long, Ngo Van & Poschke, Markus, 2018. "Capital-labor substitution, structural change and the labor income share," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 206-231.
    11. Luis Díez Catalán, 2018. "The labor share in the service economy," Working Papers 18/09, BBVA Bank, Economic Research Department.
    12. Clemens Struck & Adnan Velic, 2017. "Automation, New Technology, and Non-Homothetic Preferences," Trinity Economics Papers tep1217, Trinity College Dublin, Department of Economics.
    13. Daan Steenkamp, 2018. "Factor Substitution and Productivity in New Zealand," The Economic Record, The Economic Society of Australia, vol. 94(304), pages 64-79, March.
    14. 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.
    15. 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.
    16. Musa Orak, 2017. "Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income," International Finance Discussion Papers 1200, Board of Governors of the Federal Reserve System (U.S.).
    17. 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.
    18. Wan-Jung Cheng, 2017. "Explaining Job Polarization: The Role of Heterogeneity in Capital Intensity," IEAS Working Paper : academic research 17-A015, Institute of Economics, Academia Sinica, Taipei, Taiwan, revised Feb 2018.
    19. Trofimov, Ivan D., 2017. "Capital productivity in industrialized economies: evidence from error-correction model and Lagrange Multiplier tests," MPRA Paper 81655, University Library of Munich, Germany.

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    JEL classification:

    • D3 - Microeconomics - - Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution

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