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