The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.

The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.

Using data from the American Time Use Survey between 2003 and 2010, we document that home production absorbs roughly 30 percent of foregone market work hours at business cycle frequencies. Leisure absorbs roughly 50 percent of foregone market work hours, with sleeping and television watching accounting for most of this increase. We document significant increases in time spent on shopping, child care, education, and health. Job search absorbs between 2 and 6 percent of foregone market work hours. We discuss the implications of our results for business cycle models with home production and non-separable preferences.JEL-Codes: D13, E32, J22.

Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that is consistent with important aspects of firms’ behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a significant decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that is consistent with important aspects of firms' behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a significant decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

Zeldes, seminar participants in many universities and our discussant, Stefania Albanesi, at the 2009 ASSA Meetings for helpful suggestions. The Editor (Alan Auerbach) and two anonymous referees provided very useful comments. Karabarbounis acknowledges financial support from the Neubauer Family Faculty Fund at Chicago Booth. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

for helpful comments. We gratefully acknowledge the support of the National Science Foundation. Karabarbounis thanks the Alfred P. Sloan Foundation and Neiman thanks the Becker Friedman Institute at the University of Chicago for generous financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research.Ą t least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24404.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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. JEL-Codes: E21, E22, E23, E25.