In the postwar era, developed economies have experienced two substantial trends in the net capital share of aggregate income: a rise during the last several decades, which is well-known, and a fall of comparable magnitude that continued until the 1970s, which is less well-known. Overall, the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other. When decomposed into a return on fixed assets and a residual share of pure profits, the fall and rise of capital income outside the housing sector in the US owes mostly to the residual: it is not paralleled by fluctuations in the measured value of non-housing capital. This observation-- combined with the theory of factor substitution, and simulation results from a multisector model--casts doubt on explanations of changes in the net capital share that rely on changes in the value of capital. There is greater support in the data for narratives that emphasize cyclical and trend variation in market power

Deciphering the fall and rise in the net capital share

GDP growth slowed markedly in FY2011 as industrial and investment activity slumped and the current account deficit widened. A combination of tight monetary policy to counter persistently high inflation, strained global economic conditions, larger subsidies that pushed up the budget deficit, and lack of political consensus on resolving the policy impediments to growth were factors in the downdraft. Boosting investment and growth to match the strong performance of recent years will hinge on reaching agreement on measures to deal with long-standing and challenging policy issues. The outlook is for a moderate pickup.

Asian Development Outlook 2012: Confronting Rising Inequality in Asia

US labor share has been falling since the 1970s. I show that it has not fallen as much once items that do not add to capital, depreciation and production taxes, are netted out. Recent net labor share is within its historical range, whereas gross share is at its lowest level. This effect holds for other high-income economies. The overall picture is no longer one of unprecedented, globally declining labor share. Using gross share as a proxy for net share can give misleading results. US gross share and inequality are correlated, whereas net share, the correct measure, is not.

Is Labor's Loss Capital's Gain? Gross versus Net Labor Shares

As shown in the 1930s by Hicks and Robinson, the elasticity of substitution (σ) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of σ 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 σ is greater than 1 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 United States 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-labor 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, ideally achieved through a progressive consumption tax, would raise labor's share in income.

/pdf/recent-declines-in-labor-s-share-in-us-income-a-preliminary-3x6q6zdfon.pdf

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

The labor share is defined as the share of value added which is payed out to workers. It is therefore often also called the wage share. Generally it is assumed that value added is produced with capital and labor as input factors so that Y = F(K;L) where Y is value added or output, K the capital input, and L labor.

https://www.econstor.eu/bitstream/10419/56621/1/67118542X.pdf

The Labor Share: A Review of Theory and Evidence

This paper seeks to understand labour share dynamics in Europe over the medium run. After documenting basic empirical regularities, we quantify the contribution of shifts in the sectoral and the employment composition of the economy to labour share movements. The findings from the shift-share analysis being on the descriptive side, we next identify the factors underlying labour share behaviour through a model-based approach. We proceed along the lines of Bentolila and Saint Paul (2003) but adopt a production function with capital-skill complementarity. We show that labour share movements are driven by a complex interplay of demand and supply conditions for capital and different skill categories of labour, the nature of technological progress and imperfect market structures. Based upon robust calibration, we show that most of the declining pattern in labour shares in nine EU15 Member States is governed by capital deepening in conjunction with capitalaugmenting technical progress and labour substitution across skill categories. Although institutional factors also play a significant role, they appear to be of somewhat less importance. To illustrate the relevance of the technological explanation we quantitatively assess the dynamic impact of a permanent reduction in the fraction of unskilled employment on the labour share. We find that, for a given elasticity of substitution between skilled and unskilled labour, the more skilled labour is complementary to capital, the more pronounced the decline in the labour share.

Understanding labour income share dynamics in Europe

This paper seeks to understand labour share dynamics in Europe over the medium run. After documenting basic empirical regularities, we quantify the contribution of shifts in the sectoral and the employment composition of the economy to labour share movements. The findings from the
shift-share analysis being on the descriptive side, we next identify the factors underlying labour share behaviour through a model-based approach. We proceed along the lines of Bentolila and Saint Paul (2003) but adopt a production function with capital-skill complementarity. We show that labour share movements are driven by a complex interplay of demand and supply conditions for capital and different skill categories of labour, the nature of technological progress and imperfect market structures. Based upon robust calibration, we show that most of the declining pattern in labour shares in nine EU15 Member States is governed by capital deepening in conjunction with capitalaugmenting
technical progress and labour substitution across skill categories. Although institutional factors also play a significant role, they appear to be of somewhat less importance. To illustrate the relevance of the technological explanation we quantitatively assess the dynamic impact of a permanent reduction in the fraction of unskilled employment on the labour share. We find that, for
a given elasticity of substitution between skilled and unskilled labour, the more skilled labour is complementary to capital, the more pronounced the decline in the labour share.

Esther Pérez

Papers

Understanding labour income share dynamics in Europe

Understanding labour income share dynamics in Europe