Working Paper: NBER ID: w18154
Authors: Loukas Karabarbounis; Brent Neiman
Abstract: The stability of the labor share is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined over the last 30 years. This decline was associated with a significant increase in corporate saving, generally the largest component of national saving. We relate the labor share to corporate saving empirically and theoretically using a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and that corporate saving affects macroeconomic allocations. We argue that it is important to study the labor share and corporate saving jointly, and offer a unified explanation for their trends. A global decline in the cost of capital beginning around 1980 induced firms to shift away from labor and toward capital, financed in part with an increase in corporate saving.
Keywords: labor share; corporate saving; macroeconomic models; cost of capital
JEL Codes: E21; E22; E25; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global decline in the cost of capital (G32) | decline in labor share (E25) |
| decline in labor share (E25) | increase in corporate saving (O16) |
| global decline in the cost of capital (G32) | increase in corporate saving (O16) |
| decline in labor share (E25) | change in macroeconomic allocations (D61) |
| increase in corporate saving (O16) | change in macroeconomic allocations (D61) |
| decreasing costs of capital (G31) | increase in capital-labor ratios (J24) |