Working Paper: NBER ID: w19136
Authors: Loukas Karabarbounis; Brent Neiman
Abstract: The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.
Keywords: Labor Share; Investment Goods; Welfare Implications
JEL Codes: E21; E22; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in relative price of investment goods (E22) | Decline in labor share of income (E25) |
| Decline in relative price of investment goods (E22) | Substitution of capital for labor (D24) |
| Substitution of capital for labor (D24) | Decline in labor share of global corporate gross value added (F62) |
| Decline in relative price of investment goods (E22) | Shift away from labor towards capital (E25) |
| Decline in relative price of investment goods (E22) | Decline in labor share across various countries and industries (E25) |
| Decline in relative price of investment goods (E22) | Changes in labor share primarily driven by within-industry changes (J39) |
| Decline in relative price of investment goods (E22) | Elasticity of substitution between capital and labor (D24) |
| Decline in relative price of investment goods (E22) | Influence of markups on labor share trends (E25) |