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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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    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. 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. 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.
    5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    6. 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.
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