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Can Capital Deepening Explain the Global Decline in Labor’s Share?

Andy Glover and Jacob Short ()

Staff Working Papers from Bank of Canada

Abstract: We estimate an aggregate elasticity of substitution between capital and labor near or below one, which implies that capital deepening cannot explain the global decline in labor's share. Our methodology derives from transition paths in the neo-classical growth model. The elasticity of substitution is identified from the cross-country correlation between trends in the labor share and (a proxy for) the rental rate of capital. Trends in labor's share and the rental rate are weakly correlated across countries, and inversely related in most samples. Previous cross-country estimates of this elasticity were substantially greater than one, which we show was partly due to omitted variable bias: earlier studies used investment prices alone to proxy for the rental rate, whereas the growth model relates rental rates to investment prices and consumption growth.

Keywords: Firm dynamics; International topics; Labour markets (search for similar items in EconPapers)
JEL-codes: E13 E22 E25 J3 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019-01
New Economics Papers: this item is included in nep-lma, nep-mac and nep-opm
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Journal Article: Can Capital Deepening Explain the Global Decline in Labor's Share? (2020) Downloads
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