Capital Depreciation and Labor Shares Around the World: Measurement and Implications

Abstract

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.

Population Aging and Potential Growth in Asia

“…Gollin (2002) shows that after several adjustments, capital income shares in most economies within his sample lie in the range of 0.20-0.35. We choose a share equivalent to one-third, which is at the high end of this estimate, since his data were for the late 1980s and early 1990s and studies such as Pickety (2014) and Karabarbounis and Neiman (2014) argue that capital income shares have risen over time.…”

“…Since our simulation will run through 2050, we choose 5% for the common capital depreciation rate based on the observation by Karabarbounis and Neiman (2014) that capital depreciation rates tend to increase over time.…”

Approximating Time Varying Structural Models with Time Invariant Structures

“…We assume that all parameters but t and t are time invariant. Dueker et al (2007), Liu et al (2011), Gourio (2012, Karabarbounis and Neiman (2014), and Meier and Sprenger (2015) provide evidence that these parameters are indeed evolving over time. The …rst order approximation to the law of motion of ( t , t ) is described below.…”

Neoclassical Inequality

“…Only two studies support an elasticity above 1.5, and only three additional studies find evidence for an elasticity above one, while the median is significantly below one. 12 The most extreme estimate in Chirinko (2008) is 3.4, based on Mexican data and long-run tax reforms; it is unclear whether such an estimate should be applied to the questions at hand. More recently, Karabarbounis and Neiman (2014), Rognlie (2015), and Semieniuk (2014) argue that the aggregate elasticity of substitution is likely less than one.…”

“…We conclude that a growth model where the growth rate is exogenous 8 Because when g = 0, r = rmin, a plot of with this lower capital share of production, the elasticity of substitution must be 1.87. 12 Palivos (2008) provides two additional references that find elasticities above one, based on abandoning the CES structure in favor of a production function with a variable elasticity. These elasticities are just barely above one, however.…”