Accounting for Factorless Income

Loukas Karabarbounis and Brent Neiman

No 749, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Comparing U.S. GDP to the sum of measured payments to labor and imputed rental payments to capital results in a large and volatile residual or ?factorless income.? We analyze three common strategies of allocating and interpreting factorless income, speci?cally that it arises from economic pro?ts (Case ?), unmeasured capital (Case K), or deviations of the rental rate of capital from standard measures based on bond returns (Case R). We are skeptical of Case ? as it reveals a tight negative relationship between real interest rates and markups, leads to large ?uctuations in inferred factor-augmenting technologies, and results in markups that have risen since the early 1980s but that remain lower today than in the 1960s and 1970s. Case K shows how unmeasured capital plausibly accounts for all factorless income in recent decades, but its value in the 1960s would have to be more than half of the capital stock, which we ?nd less plausible. We view Case R as most promising as it leads to more stable factor shares and technology growth than the other cases, though we acknowledge that it requires an explanation for the pattern of deviations from common measures of the rental rate. Using a model with multiple sectors and types of capital, we show that our assessment of the drivers of changes in output, factor shares, and functional inequality depends critically on the interpretation of factorless income.

Keywords: Factor shares; Profits; Missing capital; Return to capital (search for similar items in EconPapers)
JEL-codes: E01 E22 E25 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2018-03-28
New Economics Papers: this item is included in nep-hme and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Related works:
Chapter: Accounting for Factorless Income (2018)
Working Paper: Accounting for Factorless Income (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:749

DOI: 10.21034/wp.749

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