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Corporate Taxation and the Decline of the LaborShare
Barıs Kaymak Immo Schott
University of Montréal and CIREQ
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 1
Introduction
Global decline of the labor share
.55
.6.65
.7LIS
1980 1990 2000 2010year
World USAEurope
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 2
Introduction
Theories
− Production Function◦ CES with σ < 1 and decreasing K/L (Lawrence, 2015)◦ CES with σ > 1 and increasing K/L (Karabarbounis and Neiman, 2013)
− Market Elements◦ More competition (Autor et al., 2017)◦ Less competition (De Loecker and Eeckhout, 2017)◦ Trade (Elsby et al., 2013)
− Institutional Elements◦ Unions? (Elsby et al., 2013)◦ Corporate Taxation
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 3
Introduction
Theories
− Production Function◦ CES with σ < 1 and decreasing K/L (Lawrence, 2015)◦ CES with σ > 1 and increasing K/L (Karabarbounis and Neiman, 2013)
− Market Elements◦ More competition (Autor et al., 2017)◦ Less competition (De Loecker and Eeckhout, 2017)◦ Trade (Elsby et al., 2013)
− Institutional Elements◦ Unions? (Elsby et al., 2013)◦ Corporate Taxation
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 3
Empirical Evidence
Corporate taxation and the labor share : 2007
AUSAUTCZE
DNK
ESPEST FIN
FRAGER
GRC
HUN
IRL
ITAKOR
LUX
LVA
NLD
SVK
SWE
UK
USA
R2 = 0.52
.4.4
5.5
.55
.6.6
5La
bor S
hare
10 20 30 40Corporate Tax Rate (%)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 4
Empirical Evidence
Corporate taxation and the labor share : manufacturing 2007
AUS
AUTCZE
DNK
ESPEST
FIN
FRA
GERGRC
HUN
IRL
ITA
KORLUX
LVA
NLD
SVK
SWE
UK
USA
R2 = 0.58
.3.4
.5.6
.7.8
Labo
r Sha
re
10 20 30 40Corporate Tax Rate (%)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 5
Empirical Evidence
Corporate taxation and the labor share : 1981 – 2007
AUS
AUT
CZE
DNK
ESP
EST
FINFRA GER
GRC
HUN
IRL ITA
KOR
LUX
LVA
NLD
SVK
SWE
UK
USA
R2 = 0.31-.15
-.1-.0
50
.05
Δ L
abor
Sha
re
-40 -30 -20 -10 0 10Δ Corporate Tax Rate (%)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 6
Empirical Evidence
Corporate taxation and the labor share : manufacturing 1981 –2007
AUS
AUT
CZE
DNK
ESP
EST
FIN
FRA
GERGRC
HUN
IRL
ITA
KOR
LUXLVA
NLD
SVK
SWE
UK
USA
R2 = 0.56
-.3-.2
-.10
.1Δ
Lab
or S
hare
-40 -30 -20 -10 0 10Δ Corporate Tax Rate (%)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 7
Empirical Evidence
Corporate taxation and the labor share
Manufacturing Services Aggregate
corporate tax rate 0.37** 0.06 0.16**
w/o country trends (0.10) (0.05) (0.05)
corporate tax rate 0.22** 0.15* 0.17**
with country trends (0.06) (0.06) (0.06)
N 528 528 528
Note.– * p < 0.05, ** p < 0.01. Data comes from KLEMS database and OECD 1981 to 2007. Dependent variable is labor’s share ofincome. All specifications control for fixed year and country effects. Standard errors are clustered at the country level.
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 8
Empirical Evidence
Corporate Taxes and Labor Share in the US
90#
95#
100#
105#
110#
115#
0#5#
10#15#20#25#30#35#40#45#50#
1953# 1963# 1973# 1983# 1993# 2003#
Corp#Tax/Corp#Inc# Labor#Share#(Index)#
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 9
Empirical Evidence
Corporate Taxes and Labor Share in the US
AL
AZ
AR
CA
CO
CT
DE
FL
GA
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
MIMN
MS
MOMT
NE
NV
NH
NJ NM
NY
NC
ND
OHOK
OR
PA
RI
SCSD
TN
TX
UT
VT
VAWA
WV
WIWY
1520
2530
3540
.04 .06 .08 .1 .12 .14taxl_old
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 10
Empirical Evidence
Anatomy of the Decline in the US
1 large declines within industries, primarily in K-intensive sectors
2 limited decline within establishments
3 rising share of K-intensive firms in output
4 roughly stable employment size distribution
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 11
Empirical Evidence
Labor share and value added in US Manufacturing
(a) 1967 (b) 2007
Source : Kehrig and Vincent (2017).
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 12
Empirical Evidence
Employment Concentration in Manufacturing
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1954 1964 1974 1984 1994 2004 2014
250+ (>20 only) 1000+ (>20 only) 250+ 1000+
Note.– Graph shows the inverse Pareto indexes implied by the employment shares of establishments with more than 250 and 1000 employees.
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 13
Empirical Evidence
Average Establishment Employment in Manufacturing
0
20
40
60
80
100
120
140
160
180
1954 1964 1974 1984 1994 2004 2014
ALL 20+ Estab
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 14
Model
MODEL
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 15
Model
Model Outline
− General Equilibrium Model of Industry Dynamics (Hopenhayn andRogerson, 1993)
− Firms differ in capital intensity as well as productivity
− Entry, exit and production decisions
− Income is subject to corporate taxation
− Representative household
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 16
Model
Production
− Outputqit = εit(kit
αinitβi) with αi + βi = γ < 1
− Productivity
log εit = ρ log εit−1 + σεηit, where ηt ∼ N(0, 1)
− Capital Intensity
αi ∼ G(α) drawn once at entry
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 17
Model
Timing of events
1 production stage◦ given capital, hire labor and carry out production◦ sell product and pay taxes on net income
2 research stage◦ incumbents observe productivity for the next investment cycle◦ entrants observe productivity and production technology
3 planning stage◦ if exit, dissolve company, distribute capital/profits to shareholders◦ if stay (or entrant), decide how much to invest in capital for the next period
pick up between stages 2 and 3
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 18
Model
Incumbent Firm’s Problem
V(m, ε, α) = max {Vx(m),Vc(m, ε, α)}
− Continuing Firms
Vc(m, ε, α) = m + maxk,n
{−pk + ρEε′|εV(m′, ε′, α)
}subject to
m′ = πb(k, n; ε, α)− τ ·max {0, πb(k, n; ε, α)}+ pk
πb(k, n; ε, α) = pεkαnβ − wn− wcf − δpk
− Exiting FirmsVx(m) = m
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 19
Model
Entry
− free entry
− large mass of potential entrants
− pay wce to draw α and ε
wce = Ve =
∫ ∫V(0, ε, α)dH(ε)dG(α).
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 20
Model
Distribution of Firms
Track resources
B(M) ={
m : m′(m, ε, α) ∈M for any (ε, α) ∈ (E × A)}
Entrants
µ(M, E ,A) = M∫A
∫E
dH(ε)dG(α) and m0 ∈M, and 0 otherwise.
Evolution of firm distribution
Γ′(M, E ,A) =
∫A,E,B(M)
(1− x(ε, α)) dΓ(m, ε, α)dH(ε′|ε)dG(α)
+µ(M, E ,A)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 21
Model
Households
maxc,n
c1−σ
1− σ− θ n1+φ
1 + φs.t. c = wn + d + T
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 22
Model
A stationary recursive competitive equilibrium consists of value functionsV(m, ε, α), Vc(m, ε, α) and Vx(m), policy functions k(m, ε, α), n(m, ε, α),m′(m, ε, α), and x(ε, α), a price p, labor supply Ls(w), a measure of incumbent firmsΓ and a measure of entrants µ such that :
1 V(m, ε, α), Vc(m, ε, α), Vx(m), k(m, ε, α), n(m, ε, α), m′(m, ε, α) and x(ε, α)solve the incumbent firm’s problem.
2 The free entry condition is satisfied
3 The labor market clears∫[n(m, ε, α) + cf ] dΓ + Mce = Ls(w)
4 The financial market clears
d =
∫[πb(m, ε, α)− τ ·max{0, πb(m, ε, α)}+ m− (1− x(m, ε, α)) · k(m, ε, α)] dΓ
5 Government budget is balanced :
T = τ
∫max{0, πb(m, ε, α)}dΓ
6 The distribution of incumbent firms is stationary : Γ′ = Γ.
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 23
Model
Simplified Model Analysis
Assumptions
− exogenous exit at rate x
− cf = 0
− w = 1
− Ns = 1
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 24
Model
Factor Demands
w ≡ wp
= βεkαnβ−1
rτ ≡ 1− ρρ · (1− τ)
+ δ = αεkα−1nβ
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 25
Model
Output
q = ε1
1−γ
(α
rτ
) α1−γ(β
w
) β1−γ
.
ηqrτ =α
1− γηqw =
β
1− γ
K-intensive (L-intensive) firms are more sensitive to rτ (w).
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 26
Model
Profits
After tax profits :
Πa(p, τ) = (1− τ)pq(ε, w, rτ )
(1− β − α δ
rτ
)∂Πa
∂rτ< 0
∂Πa
∂τ< 0
∂Πa
∂p> 0
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 27
Model
Entry and Market Clearing
− lower taxes reduce (increase) equilibrium prices (wages)
Ve =1
1− ρ(1− x)Eα,εΠa(
+p,−τ ) = ce
− employment shifts towards K-intensive firms
ηqrτ =α
1− γηqw =
β
1− γ
− total effect on employment and industry size is ambiguous
ce +
∫n(−p,−τ )dΓ = 1/M
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 28
Quantitative Analysis
Quantitative Question
What was the role of lower corporate tax rates in the decline of the laborshare in US Manufacturing?
Approach
− calibrate to 1960s manufacturing industry
− simulate lower corporate tax rate
Today’s Assumptions
− inelastic labor supply
− exogenous exit
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 29
Quantitative Analysis
Quantitative Question
What was the role of lower corporate tax rates in the decline of the laborshare in US Manufacturing?
Approach
− calibrate to 1960s manufacturing industry
− simulate lower corporate tax rate
Today’s Assumptions
− inelastic labor supply
− exogenous exit
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 29
Quantitative Analysis
Calibration : Preset Parameters
Parameter Value Interpretation Reason
δ 0.10 depreciation rate NIPAγ 0.85 returns to scale —ρ 0.96 discount factor annual r ≈ 4%w 1.0 wage numéraireτ 0.52 corporate income tax Gravelle (2004)
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 30
Quantitative Analysis
Distribution of Labor Intensity
1 0 βmin γ µβ
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 31
Quantitative Analysis
Calibration : SMM
Parameter Value Targets from 1967 Data Model
ρε 0.745 emp. share : smallest 65% of establishments 5.6 5.6σε 0.195 emp. share : largest 4.25% of establishments 60.1 60.0µε 0.569 average firm size —-> 60.5 60.5βmin 0.301 manufacturing labor share 55.6 55.6ce 14.50 VA-weighted p50(LS)/median(LS) 88.6 90.5
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 32
Quantitative Analysis
Distribution of Labor Shares : Model vs. Data
0.3 0.4 0.5 0.6 0.7 0.8
Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VA
Labor Share
Note.– The joint distribution of labor shares and value added. On the left are results from our model. The figure on the right is taken fromKehrig and Vincent (2017).
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 33
Quantitative Analysis
Impact of Corporate Taxes on the Labor Share
decrease the corporate tax rate to 20%
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 34
Quantitative Analysis
Impact of Corporate Taxes on the Labor Share
Corporate Tax Rate 52% 20%
Manufacturing labor share 0.556 0.485Price Level 0.872 0.643Aggregate Output 1.665 2.173Employment in smallest 65% of establishments 0.056 0.049Employment in largest 4.25% of establishments 0.600 0.625VA-weighted p50(LS)/median(LS) 0.905 0.666Average Firm Size 60.50 32.0
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 35
Quantitative Analysis
The Role of General Equilibrium Effects
Effect Effect on Labor Share
Total change -7.1ppdrop in rτ -4.1ppdrop in p -3.4pp
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 36
Quantitative Analysis
The Rise in Concentration : Model vs. Data
0.3 0.4 0.5 0.6 0.7 0.8
Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VA
Labor Share
Note.– The joint distribution of labor shares and value added. On the left are results from our model. The figure on the right is taken fromKehrig and Vincent (2017).
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 37
Alternative Theories
Alternative Explanations
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 38
Alternative Theories
Rising Markups : γ ↘
Span of Control 0.85 0.82
Manufacturing labor share 0.556 0.565Price Level 0.872 1.055Aggregate Output 1.665 1.358Employment in smallest 65% of establishments 0.056 0.10Employment in largest 4.25% of establishments 0.600 0.48VA-weighted p50(LS)/median(LS) 0.905 1.04Average Employment 60.50 51.2
0.3 0.4 0.5 0.6 0.7 0.8
Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VA
Labor Share
0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VALabor Share
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 39
Alternative Theories
Rising Price Elasticity : γ ↗
Span of control 0.85 0.88
Manufacturing labor share 0.556 0.511Price Level 0.872 0.666Aggregate Output 1.665 2.300Employment in smallest 65% of establishments 0.056 0.017Employment in largest 4.25% of establishments 0.600 0.779VA-weighted p50(LS)/median(LS) 0.905 0.656Average Firm Size 60.50 71.1
0.3 0.4 0.5 0.6 0.7 0.8
Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VA
Labor Share
0.3 0.4 0.5 0.6 0.7 0.8Labor Share BETA
0
0.02
0.04
0.06
0.08
0.1
0.12
VALabor Share
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 40
Alternative Theories
Discussion
− Corporate tax cuts are responsible for a third of the decline in the laborshare in US manufacturing.
− Endogenous exit
− Industry elasticity of substitution
− Alternative explanations
− Empirical US
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 41
Alternative Theories
K-biased technical change?
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 42
Alternative Theories
L-biased technical change
Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 43
Alternative Theories
ReferencesAUTOR, D., D. DORN, L. F. KATZ, C. PATTERSON, J. VAN REENEN,
ET AL. (2017) : The fall of the labor share and the rise of superstar firms,National Bureau of Economic Research.
DE LOECKER, J. AND J. EECKHOUT (2017) : “The rise of market power andthe macroeconomic implications,” Tech. Rep. 23687, NBER working paper.
ELSBY, M. W., B. HOBIJN, AND A. SAHIN (2013) : “The decline of the USlabor share,” Brookings Papers on Economic Activity, 2013, 1–63.
HOPENHAYN, H. AND R. ROGERSON (1993) : “Job turnover and policyevaluation : A general equilibrium analysis,” Journal of Political Economy,101, 915–938.
KARABARBOUNIS, L. AND B. NEIMAN (2013) : “The global decline of thelabor share,” The Quarterly Journal of Economics, 129, 61–103.
KEHRIG, M. AND N. VINCENT (2017) : “Growing productivity withoutgrowing wages : The micro-level anatomy of the aggregate labor sharedecline,” Mimeo.
LAWRENCE, R. Z. (2015) : “Recent Declines in Labor’s share in US Income :a preliminary neoclassical account,” Tech. Rep. 21296, NBER workingpaper.Kaymak - Schott (UdeM 2018) Labor Share and Corporate Tax 44
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