Can capital deepening explain the global decline in labor's share?

Glover, Andrew; Short, Jacob

doi:10.1016/j.red.2019.04.007

Cited by 27 publications

(16 citation statements)

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“…28. Our finding that variations in the capital/labor ratio do not explain the observed movements of labor's share is consistent with Elsby, Hobijn, andŞahin (2013), Glover and Short (2017), Oberfield and Raval (2014), and Rognlie (2015), amongst others. A common argument is that one cannot reconcile a falling wage share with a rising capitallabor ratio unless the elasticity of substitution is implausibly high.…”

Section: A Growth Accounting and The Biassupporting

confidence: 91%

“…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 2016;De Loecker and Eeckhout 2017;Gutierrez 2017;Kurz 2017) 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, andŞahin 2013; Glover and Short 2017;Oberfield and Raval 2014;Rognlie 2015). 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.…”

Section: Introductionsupporting

confidence: 76%

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

Dixon

Lim

2018

Economic Inquiry

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We investigate the relationship between labor's share, firm's market power, and the elasticity of output with respect to labor input using an approach based on an unobserved components model. The approach yields time‐varying estimates of market power and the elasticity. Evidence on the market power of firms (which we find to be rising since 2000) gives a deeper understanding of movements in labor's share and the labor wedge. The generated values of the elasticity yield revised estimates of total factor productivity growth which is informative about the extent of the downward bias inherent in traditional estimates which use labor's share as a proxy for the elasticity. (JEL O47, C32, E25)

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Section: A Growth Accounting and The Biassupporting

confidence: 91%

Section: Introductionsupporting

confidence: 76%

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

Dixon

Lim

2018

Economic Inquiry

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“…For example, Elsby, Hobijn, and Şahin (2013) discuss various reasons for why the labor share decreased. Other contributions to this literature include Karabarbounis and Neiman (2014), Bridgman (2018), Glover and Short (2018), and Koh, Santaeulália-Llopis, and Zheng (forthcoming). n NOTES 1 See Jones and Romer (2010) and Jones (2016) for summaries of a broader set of growth facts.…”

Section: Resultsmentioning

confidence: 99%

Growth and the Kaldor Facts

Herrendorf

Rogerson

Valentinyi

2019

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Given the long-standing and seemingly well-established position of the Kaldor facts in the literature, revisiting them may seem a frivolous task to undertake. There are three good reasons for nonetheless doing this. First, and somewhat ironically, the Kaldor (1961) paper that is cited for laying out the Kaldor facts does not actually contain any presentation of facts. Rather, Kaldor reported what he saw as the key patterns to be distilled after looking at various and disparate pieces of information that had been documented by other authors. Second, Kaldor described the experiences of the pre-1950 world. In contrast, many current macroeconomic studies focus on the post-1950 world, making it relevant to assess the state of the Kaldor facts for this period. Third, revisiting the Kaldor facts highlights a number of measurement issues that one needs to take a stand on. Although they are not usually discussed in detail, they can be subtle and are particularly relevant in multi-sector growth models. 2 We find that overall the Kaldor facts continue to hold, in that constant trends provide a reasonable first-order description to most of the data. But there are sizeable short-and medium-term fluctuations around the trend. In particular, we find evidence of deviations from the Kaldor facts along several dimensions: Instead of staying constant, the growth rates of real GDP per worker and of real capital per worker have slowed down in the United States and the United Kingdom since the 1970s, the capital-to-output ratio has increased in the United Kingdom, and the share of income paid to labor has decreased in the United States since 1990.Establishing the existence of a balanced growth path in the one-sector growth model and connecting its properties to the Kaldor facts is a standard exercise for first-year Ph.D. students. In recent years, the profession has gone beyond that and studied multi-sector versions of the growth models that capture the effects of secular changes in relative prices and the sectoral composition of the economy ("structural change"). It is therefore natural to ask (i) under what conditions a standard multi-sector model has a balanced growth path along which the updated Kaldor facts hold and (ii) what this multi-sector model has to say about the deviations from the original Kaldor facts. This is the second goal of our article.One of our key points is that, with the one-sector growth model, it is immediate to go from model-based measures to empirical measures; this is not the case for multi-sector growth models. The reason for this is that the one-sector model has no changes in relative prices, implying that many statistics are effectively unit free. This is not the case for multi-sector growth models, which were constructed precisely to capture the effects of secular changes in relative prices. As a result, the issue of which units should be used to measure the statistics behind the Kaldor facts takes center stage in multi-sector models.A basic principle of connecting models with data requires measuring...

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“…Grossman et al . () also point out that Glover and Short () re‐estimate the Karabarbounis and Neiman regression including the growth rate of consumption in addition to the relative price of investment as an explicative variable (but also without controlling for changes in schooling), and find an aggregate elasticity of substitution that indeed is not statistically different from 1.…”

mentioning

confidence: 99%

The Decline in Capital Efficiency and Labour Share

Rio

Lores

2018

Economica

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We calibrate and simulate a neoclassical growth model with a variable elasticity of substitution production function and three types of technological change: labour-augmenting, capital-augmenting and investmentspecific. In this framework, we find that the decline in US labour share was caused by a large decline in capital efficiency, which led to a decrease in the ratio of effective capital to effective labour in a context in which capital and labour are gross complements. Moreover, the decline in the relative price of investment contributed to reducing the fall in US labour share, while the increase in the economic depreciation rate of US fixed assets accounted for a small reduction in US labour share. 636 ECONOMICA [OCTOBER implicitly recognizes it when he writes: 'Until the laws of thermodynamics are repealed, I shall continue to relate outputs to inputs-i.e. to believe in production functions'. Both the intensity and direction of the changes in the relative factor shares will depend on the shape of the production function and the bias of technological change.According to neoclassical theory, if markets are frictionless, and perfectly competitive, then gross labour share equals the output elasticity for labour, which is an increasing (resp. decreasing) function of the ratio of effective capital to effective labour if and only if the elasticity of substitution between capital and labour is lower (resp. higher) than 1. Moreover, the lower the elasticity of substitution between capital and labour, the higher the fall in gross labour share which is caused by the decrease in the ratio of effective capital to effective labour. 4 Therefore the technological forces causing a fall in the ratio of effective capital to effective labour lead to a fall in gross labour share if capital and labour are gross complements, while they lead to a rise in gross labour share if capital and labour are gross substitutes.Although there is some debate, empirical evidence increasingly indicates that the elasticity of substitution between capital and labour is lower than 1. Our own estimations support this hypothesis. However, Piketty (2014) estimates an elasticity of substitution between 1.3 and 1.6, while Karabarbounis and Neiman (2014) obtain an average estimate of 1.25. More recently, Koh et al. (2017) estimate that the elasticity of substitution between a constant elasticity of substitution (CES) aggregator of two types of capital (intellectual property and equipment plus structures) and labour is 1.13. Many studies estimate elasticities of substitution lower than 1. In their pioneering study, Arrow et al. (1961) estimate an elasticity of substitution of 0.57 using data on 24 manufacturing industries in a sample of 19 countries. David and van de Klundert (1965) and Kalt (1978) estimate elasticities of substitution equal to 0.32 and 0.76, respectively. Based on a literature survey, Hamermesh (1993) concludes that the elasticity of substitution is likely to be in the range 0.3-0.7. Chirinko et al. (2004), using an extensive panel of 1,...

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Can capital deepening explain the global decline in labor's share?

Cited by 27 publications

References 16 publications

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

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

Growth and the Kaldor Facts

The Decline in Capital Efficiency and Labour Share

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