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Accounting for Income Shares: The Changing Demographic Distribution of Earnings and the Decline in Labor Share

Author

Listed:
  • Jacob Short

    (University of Western Ontario)

  • Andrew Glover

    (University of Texas Austin)

Abstract

This paper estimates the the demographic distribution of earnings on labor’s share of income. We relax the assumption of perfectly com- petitive wages and show that the aggregate labor share is no longer a simple function of production parameters, but is instead an earnings- share-weighted harmonic mean of labor shares across demographic groups. We document that the share of earnings accruing to elder workers has risen sharply in recent years, coincidental with the ma- jority of the decline in labor’s share. We then use an IV approach to estimate that a one percentage point shift in earnings towards elder workers leads to a 0.25 percentage point decline in labor’s share. We rationalize our empirical findings by extending two standard theories of frictional labor markets to include a life-cycle of productivity which endogenously grows faster than earnings.

Suggested Citation

  • 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.
    • Handle: RePEc:red:sed016:1631
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    File URL: https://economicdynamics.org/meetpapers/2016/paper_1631.pdf
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    References listed on IDEAS

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    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. 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.
    3. Loukas Karabarbounis & Brent Neiman, 2014. "The Research Agenda: Loukas Karabarbounis and Brent Neiman on the Evolution of Factor Shares," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 15(2), November.
    4. Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," Working Paper Series WP15-10, Peterson Institute for International Economics.
    5. Michael Elsby & Bart Hobijn & Ayseful Sahin, 2013. "The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 1-63.
    6. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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