Can Capital Deepening Explain the Global Decline in Labor's Share?

Abstract

Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank's Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

Labor's Share, the Firm's Market Power, and Total Factor Productivity

“…Our finding that variations in the capital/labor ratio do not explain the observed movements of labor's share is consistent with Elsby, Hobijn, and Şahin (), Glover and Short (), Oberfield and Raval (), and Rognlie (), amongst others. A common argument is that one cannot reconcile a falling wage share with a rising capital‐labor ratio unless the elasticity of substitution is implausibly high.…”

“…We also delve deeper into the separate contributions of variations over time in both product and labor market markups to variations in firms' market power, and we investigate the cyclicality of both labor's share and the wedge (and their determinants). Our results suggest that the fall in the wage‐share commencing in the early 2000s is associated with a marked rise in the market power of firms (a result also found in Barkai ; De Loecker and Eeckhout ; Gutierrez ; Kurz ) and also that variations in the capital/labor ratio do not explain the observed movements of labor's share (a finding consistent with Elsby, Hobijn, and Şahin ; Glover and Short ; Oberfield and Raval ; Rognlie ). Importantly our approach allows us to generate a time series for the elasticity of output with respect to labor input which in turn yields estimates of the bias in estimating TFP using the traditional wage‐share approach.…”

Firm Heterogeneity and the Aggregate Labour Share

“…Zeira (1998); Acemoglu (2003); Brynjolfsson and McAfee (2014) and Acemoglu and Restrepo (2018) point to (capital augmenting) technological change as a main driver, with Autor and Salomons (2018) and Eden and Gaggl (2018) focusing in particular on the role of automation. Piketty (2014); Piketty and Zucman (2014) and Glover and Short (2019) stress the role of capital accumulation. Harrison (2002); Bentolila and Saint-Paul (2003); Acemoglu (2003) and Karabarbounis and Neiman (2014) point to the decline in the price of capital relative to labour, while Hergovich and Merz (2018) and León-Ledesma and Satchi (2018) stress increased factor substitutability between capital and labour, and Grossman et al (2018) bring the attention to a slowdown in productivity.…”

Corporate Tax Cuts and the Decline in the Manufacturing Labor Share

“…Lawrence (2015) argues that capital and labor are complements and attributes the fall of the labor share to effective labor deepening that resulted from labor‐augmenting technical change. Glover and Short (2019) find an elasticity of substitution between capital and labor near or below unity, implying that capital deepening cannot explain the decline in the labor share. Alvarez‐Cuadrado, Van Long, and Poschke (2018) assume that labor and capital are gross complements, and argue that the fall in the labor share is a result of differences in the paces of capital‐biased technical change in the service and manufacturing sectors.…”