NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

Robert Z. Lawrence

NBER Working Paper No. 21296
Issued in June 2015
NBER Program(s):Development of the American Economy, Labor Studies

As shown in the 1930s by Hicks and Robinson the elasticity of substitution (`sigma`) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of `sigma` is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that `sigma` is greater than one and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the US has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that σ is less than 1, these declines in the effective capital ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation would raise labor's share in income.

download in pdf format
   (641 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21296

Users who downloaded this paper also downloaded* these:
Hanushek, Ruhose, and Woessmann w21295 Knowledge Capital and Aggregate Income Differences: Development Accounting for U.S. States
Karabarbounis and Neiman w20606 Capital Depreciation and Labor Shares Around the World: Measurement and Implications
Fraumeni, Christian, and Samuels w21284 The Accumulation of Human and Nonhuman Capital, Revisited
Glaeser and Nathanson w20426 Housing Bubbles
Bagwell, Bown, and Staiger w21303 Is the WTO passé?
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us