Labor share and income distribution: Size of the cake or the cake portion?

Anelí Bongers, Benedetto Molinari and Jose Torres ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper analyzes the macroeconomic and distributional effects of declining labor share as observed during the last decades. We use a neoclassical general equilibrium model with two types of households, workers and capitalists, endowed with a CES production function, in which the distributional parameter matches labor share. This implies the existence of a technological nexus between the observed labor share and the distributional parameter of the CES function. We explore that technological nexus and show that both capitalists' and workers' income increase as labor income declines depending on the elasticity of substitution between capital and labor. The effect of labor share changes on income distribution does not depend on the elasticity of substitution, and hence, relative income and relative consumption decrease for workers, increasing inequality. When capital depreciation rate is taken into account, the decline in labor share has a limited impact on the functional distribution of net income.

Keywords: Functional distribution of income; Labor share; Workers; Capitalists (search for similar items in EconPapers)
JEL-codes: E25 J30 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:21-06

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