Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

Robert Lawrence

No WP15-10, Working Paper Series from Peterson Institute for International Economics

Abstract: As shown in the 1930s by Hicks and Robinson, the elasticity of substitution (s) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of s is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that σ is greater than 1 and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that s is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.

Keywords: Inequality; Labor Share; Elasticity of Substitution; Labor-Augmenting Technical Change (search for similar items in EconPapers)
JEL-codes: D3 D33 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (133)

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Working Paper: Recent Declines in Labor's Share in U.S. Income: A Preliminary Neoclassical Account (2015)
Working Paper: Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account (2015)
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