The Global Decline of the Labor Share*

Abstract

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 Drivers of Structural Change

“…Sectoral ‘capital‐labour’ ratios, therefore, can grow at very different rates, allowing factor income shares – that are not structural parameters in the presence of CES production functions – to evolve with the passage of time, an evidence recently documented by, for example Elsby et al . (), Karabarbounis and Neiman () and Alvarez‐Cuadrado et al . ().…”

Effect of the ICT Ecosystem Structure on the Sustainable Growth of ICT Firms: A Metafrontier Analysis on China, South Korea, the United States, and Japan

“…Third, our results reveal that a firm's efficiency is positively related to total assets and negatively related to the number of employees. These results are intuitive because the labor share has declined [30]. Note: *** indicates statistically significant at the 1% level.…”

Capital Share Risk in U.S. Asset Pricing

“…Most notable is the difficulty with separating income of sole proprietors into components attributable to labor and capital inputs. But Karabarbounis and Neiman () report trends for the labor share, that is, changes within the corporate sector that are similar to those for sectors that include sole proprietors, such as the BLS nonfarm measure (which makes specific assumptions on how proprietors' income is proportioned). Indirect taxes and subsidies can also create a wedge between the labor and the capital shares, but Gomme and Rupert () find that these do not vary much over time, so that movements in the labor share are still strongly (inversely) correlated with movements in the capital share.…”