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.

Technological change, rent and income inequalities: A Schumpeterian approach

“…To this end, we assume a comparative approach that includes a variety of countries. The stylized fact of the global decline of labour share (Karabarbounis and Neiman, 2014) makes our focus on rent inequality all the more relevant.…”

The Labor Share Question in China

“…Solow's 1958 article laid the foundation for the neoclassical approach to the labor share question. Studies following this approach consider the elasticity of substitution and sectoral structure-the two factors discussed by Solow (1958)-as the determinants of labor's share (Bentolila and Saint--paul, 2003;Karabarbounis and Neiman, 2013).…”

“…Bentolila and Saint--paul (2003) and Karabarbounis and Neiman (2013) represent applications of the neoclassical approach, while studies such as Diwan (2001), Harrison (2002), and Jayadev (2007) provide empirical analyses that have no relation with the neoclassical approach. Generally speaking, these studies emphasize the role of three factors in the determination of labor's share.…”

“…They also find these variables have negative effects on labor's share for 19 OECD countries over 81 the period 1960--2008. Karabarbounis and Neiman (2013) The neoclassical approach to the labor share question is a kind of "technological determinism" and meanwhile circular reasoning. First of all, labor's share under this approach is determined by a production function that reveals certain technology; however, this approach never examines whether changes in technology do happen through observing the production process before it explains labor's share with technology.…”

“…One approach (hereafter, conventional approach) is based on GDP accounting, which is widely used in both orthodox and heterodox literature (for example, Bentolila and Saint--14 paul, 2003;Karabarbounis and Neiman, 2013;Weisskopf, 1979;Onaran et al, 2011).…”