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Capital Depreciation and Labor Shares Around the World: Measurement and Implications

Author

Listed:
  • Brent Neiman

    (University of Chicago)

  • Loukas Karabarbounis

    (University of Chicago)

Abstract

The labor share is typically measured as compensation to labor relative to gross value added ("gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share") may be more important in some settings, however, because depreciation is not consumed. In this paper we make three contributions. First, we document that gross and net labor shares generally declined together in most countries around the world over the past four decades. Second, we use a simple economic environment to show that declines in the price of capital necessarily cause gross and net labor shares to move in the same direction, whereas other shocks such as a decline in the real interest rate may cause the net labor share to rise when the gross labor share falls. Third, we illustrate that whether the gross or the net labor share is a more useful proxy for inequality during an economy's transition depends sensitively on the nature of the underlying shocks that hit the economy.

Suggested Citation

  • Brent Neiman & Loukas Karabarbounis, 2015. "Capital Depreciation and Labor Shares Around the World: Measurement and Implications," 2015 Meeting Papers 357, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:357
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    References listed on IDEAS

    as
    1. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 61-103.
    2. Benjamin Bridgman, 2014. "Is Labor's Loss Capital's Gain? Gross versus Net Labor Shares," BEA Working Papers 0114, Bureau of Economic Analysis.
    3. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, Oxford University Press, pages 1255-1310.
    4. Odran Bonnet & Pierre-Henri Bono & Guillaume Chapelle & Etienne Wasmer, 2014. "Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century," Sciences Po Economics Discussion Papers 2014-07, Sciences Po Departement of Economics.
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    Cited by:

    1. Per Krusell & Anthony Smith & Joachim Hubmer, 2015. "The historical evolution of the wealth distribution: A quantitative-theoretic investigation," 2015 Meeting Papers 1406, Society for Economic Dynamics.
    2. Canova, Fabio & Ferroni, Filippo & Matthes, Christian, 2015. "Approximating Time Varying Structural Models With Time Invariant Structures," Working Paper 15-10, Federal Reserve Bank of Richmond.
    3. Koh, Dongya; Santaeulàlia-Llopis, Raül; Zheng, Yu, 2015. "Labor share decline and intellectual property products capital," Economics Working Papers ECO2015/05, European University Institute.
    4. Thomas Piketty, 2015. "About Capital in the Twenty-First Century," American Economic Review, American Economic Association, vol. 105(5), pages 48-53, May.
    5. 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.
    6. Thomas Piketty, 2015. "Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century," Journal of Economic Perspectives, American Economic Association, pages 67-88.
    7. Gresik, Thomas A. & Schindler, Dirk & Schjelderup, Guttorm, 2015. "The Effect of Tax Havens on Host Country Welfare," Discussion Papers 2015/19, Norwegian School of Economics, Department of Business and Management Science.
    8. Per Krusell & Anthony Smith & Joachim Hubmer, 2015. "The historical evolution of the wealth distribution: A quantitative-theoretic investigation," 2015 Meeting Papers 1406, Society for Economic Dynamics.
    9. Bengtsson, Erik & Waldenström, Daniel, 2015. "Capital Shares and Income inequality: Evidence from the Long Run," IZA Discussion Papers 9581, Institute for the Study of Labor (IZA).
    10. Lilia Maliar & Serguei Maliar & John Taylor & Inna Tsener, 2015. "A Tractable Framework for Analyzing a Class of Nonstationary Markov Models," NBER Working Papers 21155, National Bureau of Economic Research, Inc.
    11. Serguei Maliar & John Taylor & Lilia Maliar, 2016. "The Impact of Alternative Transitions to Normalized Monetary Policy," 2016 Meeting Papers 794, Society for Economic Dynamics.
    12. Benjamin Bridgman, 2016. "Engines of Leisure," BEA Working Papers 0137, Bureau of Economic Analysis.
    13. D., Ivan, 2017. "Stability of the labour shares: evidence from OECD economies," MPRA Paper 79822, University Library of Munich, Germany.
    14. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, pages 148-176.
    15. Benjamin Bridgman, 2014. "Is Labor's Loss Capital's Gain? Gross versus Net Labor Shares," BEA Working Papers 0114, Bureau of Economic Analysis.
    16. Erik Bengtsson & Daniel Waldenstršm, 2016. "Capital shares and income inequality: Evidence from the long run," Working Papers 0092, European Historical Economics Society (EHES).
    17. 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.
    18. Bengtsson, Erik & Waldenström, Daniel, 2015. "Capital shares and income inequality: Evidence from the long run," CEPR Discussion Papers 11022, C.E.P.R. Discussion Papers.
    19. Keisuke Otsu & Katsuyuki Shibayama, 2016. "Population Aging and Potential Growth in Asia," Asian Development Review, MIT Press, vol. 33(2), pages 56-73, September.
    20. Thomas Piketty, 2015. "A Historical Approach to Property, Inequality and Debt: Reflections on Capital in the 21st Century," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 16(1), pages 40-49, May.

    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
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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