The Global Upward Trend in the Profit Share

Abstract

Profits growth has been strong in many developed economies in recent years, and the profit share-the share of factor income going to capital-has been high compared with historical experience. This paper shows that, rather than being a recent phenomenon, profit shares have trended upwards since about the mid 1980s in most developed economies for which comparable data are available. There are a number of possible explanations for this, but not all of them are consistent with a global trend over two decades, nor do they fit crosscountry differences in the trend in the profit share. The preferred explanation advanced in this paper is that ongoing technological progress has increased the rate of obsolescence of capital goods. This induces a greater rate of churn in both capital and jobs, which puts firms in a stronger bargaining position relative to a labour force that now faces more frequent job losses on average. Firms can therefore reap a larger fraction of the economic surplus created by market frictions, which raises the measured profit share. This effect is stronger where labour market institutions are more rigid, consistent with the crosscountry pattern in the trends in the profit share. There is also a positive relationship between the size of the trend in the profit share, and the extent of product market regulation. This suggests a role for competition and innovation in driving down high profit margins. These explanations appear to fit the data better than alternatives raised in the literature.

Globalization, Structural Change and Productivity Growth

“…In this same study, three aspects of globalization (related to prices, offshoring and immigration) combined to play a large role in explaining the declining labour share. A study by Ellis and Smith (2007) finds no connection between openness and the profit share, but links the rising profit share in 19 OECD countries over 1960-95 to increased "churning" in the labour market. They write: "This greater churn strengthens firms' bargaining positions and allows them to capture a larger share of factor income" (Ellis and Smith, 2007, p. 18).…”

Globalization, Offshoring and Economic Insecurity in Industrialized Countries

“…The study by Ellis and Smith (2007) finds no connection between openness and the profit share, but links the rising profit share to increased "churning" in the labor market. While the authors attribute this churning to technological change, it seems likely that it also results from some of the indirect effects of globalization discussed below.…”

Labor Income Share Consequences of Global Financial Crisis: Evidence from Turkey

“…According to this calculation, capital income is the part of self-employed income that exceeds the mean wage sum. Using this method, Gollin (2002) obtained relatively stable labor shares in developing countries, and this approach has been widely used in the literature (Bernanke and Gürkaynak, 2001 5 ;Bentolila and Saint-Paul, 2003;IMF, 2007;EC, 2007;Ellis and Smith, 2007;Xiang, 2008;Guerriero, 2012). Guerriero (2012) proposed a further adjustment to Gollin's measure that excludes the income earned by "employers" from the compensation of employees to avoid the overestimation of labor share.…”