Working Paper: NBER ID: w20606
Authors: Loukas Karabarbounis; Brent Neiman
Abstract: The labor share is typically measured as compensation to labor relative to gross value added ("gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share") may be more important in some settings, however, because depreciation is not consumed. In this paper we make three contributions. First, we document that gross and net labor shares generally declined together in most countries around the world over the past four decades. Second, we use a simple economic environment to show that declines in the price of capital necessarily cause gross and net labor shares to move in the same direction, whereas other shocks such as a decline in the real interest rate may cause the net labor share to rise when the gross labor share falls. Third, we illustrate that whether the gross or the net labor share is a more useful proxy for inequality during an economy's transition depends sensitively on the nature of the underlying shocks that hit the economy.
Keywords: Labor Share; Capital Depreciation; Inequality; Economic Growth
JEL Codes: E21; E22; E23; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Declines in the price of capital (G31) | Declines in gross labor share (E25) |
| Declines in the price of capital (G31) | Declines in net labor share (E25) |
| Declines in the real interest rate (E43) | Increase in net labor share (J39) |
| Declines in the real interest rate (E43) | Declines in gross labor share (E25) |
| Underlying shocks (E32) | Relationship between labor shares and inequality (J70) |
| Gross and net labor shares have generally declined together (E25) | Economic conditions affecting labor shares (E25) |
| Declines in the price of capital (G31) | Labor shares (gross and net) (J39) |