The Global Decline of the Labor Share

Brent NeimanUniversity of Chicago

Myron Scholes Global Markets ForumChicago Booth Initiative on Global Markets

April 20, 2016

Stylized Fact: Labor Share of GDP Roughly Constant

.55

.65

.75

1945 1955 1965 1975 1985 1995 2005 2015

U.S. Non-Farm Business Sector Labor Share

Keynes (1939): “[Stability of sL is] one of the most surprising, yetbest-established, facts in the whole range of economic statistics.”

Implications: Inequality

• Ricardo (1817):

“the proportions of the whole produce of the earth which willbe allotted to each of these classes [rent and profit, andwages]... To determine the laws which regulate thisdistribution, is the principal problem in Political Economy.”

• Labor share has long been used as proxy for inequality, from:

• 1965: IEA conference on income inequality (> 50% of papers)

• 2014: Thomas Piketty’s Capital in the 21st Century

Implications: Models of Macroeconomy

• Kaldor (1957):

“A satisfactory model concerning the nature of growth processin a capitalist economy must also account for the remarkablehistorical constancies... that the share of wages and the shareof profits in the national income has shown in developedcapitalist economies of the United States and the UnitedKingdom since the second half of the nineteenth century.”

• Cobb-Douglas (1928) production is standard

• Labor share shocks proxy profits (Gali and Gertler, 1999)

Implications: Growth and Technology

• Acemoglu (2002):

“There is now a large and influential literature on thedeterminants of aggregate technical progress.... This literaturedoes not address questions related to the direction and bias oftechnical change...”

• Lucas (1988) and Romer (1990): Focus on human capital

• Greenwood et al. (1997): Focus on investment-specific change

Stylized Fact: Labor Share of GDP Roughly Constant

.55

.65

.75

1945 1955 1965 1975 1985 1995 2005 2015

U.S. Non-Farm Business Sector Labor Share

Latest Research: Labor Share of GDP Declining?

.55

.65

.75

1945 1955 1965 1975 1985 1995 2005 2015

U.S. Non-Farm Business Sector Labor Share

Latest Research: Labor Share of GDP Declining?

.55

.65

.75

1945 1955 1965 1975 1985 1995 2005 2015

U.S. Non-Farm Business Sector Labor Share

Agenda

• The Global Decline of the Labor Share

• What Caused the Decline?

• Relation to Inequality (Worker-Capitalist and Modern)

• Other Implications?

• Material is based on series of papers, all of which I’veco-authored with my colleague Loukas Karabarbounis.

Key National Accounting Concepts

Compensation of Labor

Corporate Savings

Dividends

Other Paymentsto Capital

Corporate Gross Value Added

Household Gross Value Added

Government Gross Value Added

Taxes on Products

GDP (Y) Corporate Gross Value Added

Global Labor Share

.5.5

5.6

.65

Glo

bal L

abor

Sha

re

1975 1980 1985 1990 1995 2000 2005 2010 2015

Corporate Sector Overall

Labor Shares in Advanced Economies

.55

.6.6

5.7

.75

Labo

r S

hare

1975 1985 1995 2005 2015

United States

.55

.6.6

5.7

.75

Labo

r S

hare

1975 1985 1995 2005 2015

Japan.5

5.6

.65

.7.7

5La

bor

Sha

re

1975 1985 1995 2005 2015

France

.55

.6.6

5.7

.75

Labo

r S

hare

1975 1985 1995 2005 2015

Germany

Labor Shares in Developing Economies

.25

.35

.45

Labo

r S

hare

1990 1995 2000 2005 2010 2015

China

.25

.35

.45

Labo

r S

hare

1990 1995 2000 2005 2010 2015

India.2

5.3

5.4

5La

bor

Sha

re

1990 1995 2000 2005 2010 2015

Mexico

.25

.35

.45

Labo

r S

hare

1990 1995 2000 2005 2010 2015

Colombia

Labor Shares in Scandinavian Economies

.55

.6.6

5.7

.75

Labo

r S

hare

1975 1985 1995 2005 2015

Sweden

.45

.5.5

5.6

.65

Labo

r S

hare

1975 1985 1995 2005 2015

Norway.5

5.6

.65

.7.7

5La

bor

Sha

re

1975 1985 1995 2005 2015

Denmark

.55

.6.6

5.7

.75

Labo

r S

hare

1975 1985 1995 2005 2015

Finland

Distribution of Labor Share Trends

CH

N

GE

R ITA

FR

AC

AN

JPN

US

A

GB

R

-15

-10

-50

510

Labo

r S

hare

Tre

nds,

Per

cent

age

Poi

nts

per

10 Y

ears

U.S. State Level Labor Shares

-6-4

-20

24

6La

bor

Sha

re T

rend

s, P

erce

ntag

e P

oint

s pe

r 10

Yea

rs

WA

DE

VT HI

RH

NV

KS

CT

SC

ME

PA

CA IN VA

DC

TN

NH

OR

OH

WY

NC AZ

WV NJ

LA FL

GA ID MI

AL

OK

TX

MO IL

MD

MA

NM NY

MS

AR

CO

MN WI

UT

NE IA SD

KY

MT

ND

Industry Labor Shares

-6-4

-20

24

6

Labo

r S

hare

Tre

nds

Per

cent

age

Poi

nts

per

10 Y

ears

Min

ing

Tra

nspo

rt

Man

ufac

turin

g

Util

ities

Who

lesa

le &

Ret

ail

Pub

lic S

vs.

Con

stru

ctio

n

Hot

els

Agr

icul

ture

Fin

. & B

us. S

vs.

Within vs. Between Components

AUS

AUT

BEL

CYP

CZE

DNK

EST

FIN

FRA

GER

GRC

HUN

IRLITA

JPN

KOR

LVA

LTU

LUX

MLT

NLD

POL

PRT

SVKSVN

ESP

SWE

GBR

USA

-6-4

-20

24

With

in-I

ndus

try

Com

pone

nt

-6 -4 -2 0 2 4Labor Share Trends, Percentage Points per 10 Years

∆sLi =∑k

ω̄i,k∆sLi,k︸ ︷︷ ︸Within-Industry

+∑k

s̄Li,k∆ωi,k︸ ︷︷ ︸Between-Industry

Agenda

• The Global Decline of the Labor Share

• What Caused the Decline?

• Relation to Inequality (Worker-Capitalist and Modern)

• Other Implications?

• Material is based on series of papers, all of which I’veco-authored with my colleague Loukas Karabarbounis.

Investment Price (ξ)

-.4

-.3

-.2

-.1

0.1

.2Lo

g R

elat

ive

Pric

e of

Inve

stm

ent (

1980

=0)

1950 1960 1970 1980 1990 2000 2010 2020

PWT WDI KLEMS

Estimates of Elasticity of Substitution (σ)

Data Source Data Sourcefor sL for ξ σ̂ S.E. 90% CI Obs.

KN Merged PWT 1.25 0.08 [1.11,1.38] 58

KN Merged WDI 1.29 0.07 [1.18,1.41] 54

OECD/UN PWT 1.20 0.08 [1.06,1.34] 50

OECD/UN WDI 1.31 0.06 [1.20,1.42] 47

KLEMS 1 KLEMS 1.17 0.06 [1.06,1.27] 129

KLEMS 2 KLEMS 1.49 0.13 [1.28,1.70] 129

What Does σ > 1 Mean?

• This is very controversial area ... not (yet!) consensus

• KN story: IT/Globalization made capital goods cheaper.Firms more-than-proportionately substituted away from labor.

• Other Explanations?

• KN (2014), Rognlie (2015): Economic profits / markups

• Elsby, Hobijn, and Sahin (2015): Outsourcing

• Unions / Bargaining Power, Transition, Skill Mix, Measurement

Agenda

• The Global Decline of the Labor Share

• What Caused the Decline?

• Relation to Inequality (Worker-Capitalist and Modern)

• Other Implications?

• Material is based on series of papers, all of which I’veco-authored with my colleague Loukas Karabarbounis.

Labor Share as Proxy for Income Inequality

• Workers who earn labor income WL

• Capitalists who earn capital income RK

• Since Y = WL + RK , income inequality is perfectly capturedby the gross labor share:

sGL =WL

Y=

WL

GDP

Proxy for Consumption Inequality in Steady State• In steady state, workers consume earnings, while capitalists

must invest:

CWorkers = WL

CCapitalists = RK − I = RK − δK

• So in steady state, consumption or welfare-based inequalitymay be better proxied by net labor share:

sNL =WL

Y − δK=

WL

NDP

• Note that:

sNL = sGL × GDP

NDP

Can Net and Gross Move Differently?

• Summers to Piketty: Even if gross labor share falls, ifdepreciation rises as a share of GDP, net labor share may rise

• This is highly plausible in response to certain shocks:

• Declining real interest rates (Piketty)

• Secular stagnation (Summers),

• But unlikely in response to a declining investment price(Karabarbounis-Neiman)

• Logic? Note that NDP/GDP depends on ξ × δ × KY

Did Net and Gross Move Differently?

ARG

AUS

BFA

BHR

BMU

BOLBRACAN

CHN

COL

CRICZE

DEU

DNK

DOM

FIN

FJI

FRA GBR

HKG

IDN

IND

ISL

ISR

ITA

JAMJOR

JPN KEN

KGZ

KOR

LKA

LTU

LVA

MAC

MEX

MKD

MLT

MNG

MUSNAM

NER

NGANLD

NORNZL

PAN

PER

PHL

PRT

ROU

RWA

SENSGP

SLE

SVKSVN

SWETHA

TTO TUN

TUR

TWN

TZA

USA

ZAF

ZWE

-.15

-.1

-.05

0.0

5.1

Tre

nd in

Net

Tot

al L

abor

Sha

re

-.15 -.1 -.05 0 .05 .1Trend in Gross Total Labor Share

Which Better Proxies Inequality in Transition

0 20 40 60 80 1001

1.1

1.2

1.3

Labo

r T

echn

olog

y

0 20 40 60 80 100−0.01

0

0.01

Cha

nge

in L

abor

Sha

re

0 20 40 60 80 100

−0.03

−0.02

−0.01

0

0.01

Cha

nge

in In

equa

lity

0 20 40 60 80 1000

0.1

0.2

0.3

Cha

nge

in W

elfa

re

sGLsNL

CK/CN

(1 − sGL )/sGL

(1 − sNL )/sNL

λN

λK

What About “Modern” Inequality?

• But it is unappealing to assume people are purely capitalistsor laborers – most people have both types of income

• In particular, assume yi = yLi + yKi

• Consider following decomposition:

CV (y) = sLρ(yL, y

)CV

(yL)

+ (1 − sL)ρ(yK , y

)CV

(yK)

• One sticky point is that in standard models, ρ term isimportant, and not easy to find data suitable to measure it!

Agenda

• The Global Decline of the Labor Share

• What Caused the Decline?

• Relation to Inequality (Worker-Capitalist and Modern)

• Other Implications?

• Material is based on series of papers, all of which I’veco-authored with my colleague Loukas Karabarbounis.

The Global Rise of Corporate Saving

-.05

0.0

5.1

.15

Sec

tora

l Sav

ing

to G

loba

l GD

P

1980 1985 1990 1995 2000 2005 2010 2015

Corporates Households Government

Other Related Areas (Some Work in Progress...)

• Intangible Investment

• Globalization

• Optimal Capital Taxation

• Budget Forecasts

• Capital-Skill Complementarity

• Mutiple Capital Types

• Long-run Growth

• Etc.

Conclusion

• We uncover pervasive long-run decline in labor’s share of GDP

• We offer evidence of one important channel and arecontinuing to think through others

• Given ubiquity of constant labor share in models, implicationspotentially include new perspective on many topics