Accounting for Income Shares: The Changing Demographic Distribution of Earnings and the Decline in Labor Share

Jacob Short and Andy Glover

No 1631, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper estimates the the demographic distribution of earnings on labor’s share of income. We relax the assumption of perfectly com- petitive wages and show that the aggregate labor share is no longer a simple function of production parameters, but is instead an earnings- share-weighted harmonic mean of labor shares across demographic groups. We document that the share of earnings accruing to elder workers has risen sharply in recent years, coincidental with the ma- jority of the decline in labor’s share. We then use an IV approach to estimate that a one percentage point shift in earnings towards elder workers leads to a 0.25 percentage point decline in labor’s share. We rationalize our empirical findings by extending two standard theories of frictional labor markets to include a life-cycle of productivity which endogenously grows faster than earnings.

Date: 2016
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