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Karabarbounis, Loukas; Neiman, Brent

Article Trends in factor shares: Facts and implications

NBER Reporter

Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass.

Suggested Citation: Karabarbounis, Loukas; Neiman, Brent (2017) : Trends in factor shares: Facts and implications, NBER Reporter, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. 4, pp. 19-22

This Version is available at: http://hdl.handle.net/10419/178760

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Adolescent Behavior,” Economic Inquiry, Trends in Factor Shares: Facts and Implications explain their generally better outcomes. Salvanes, “The More the Merrier? 44(2), 2006, pp. 215–33. The Effect of Family Composition on Return to Text Conclusion Children’s Education” NBER Working 9 F. Cunha and J. Heckman, “The Loukas Karabarbounis and Brent Neiman Paper No. 10720, September 2004, Technology of Skill Formation,” NBER In the past two decades, with the and Quarterly Journal of Economics, Working Paper No. 12840, January increased accessibility of administrative 120(2), 2005, pp. 669–700. 2007. datasets on large swaths of the popula- Return to Text Return to Text The of national income The Global Decline tion, and other researchers 3 S. Black, P. Devereux, and K. 10 R. Zajonc and G. Markus, “Birth between capital and labor and the determi- of the Labor Share have been better able to identify the role Salvanes, “Older and Wiser? Birth Order and Intellectual Development,” nants of that split are important for many of birth order in the outcomes of children. Order and the IQ of Young Men,” NBER Psychological Review, 82(1), 1975, reasons. The evolution of factor shares over Our work builds on a dataset that we There is strong evidence of substantial dif- Working Paper No. 13237, July 2007, pp. 74–88; R. Zajonc, “Family time affects income inequality across house- collected from national income and product ferences by birth order across a range of and CESifo Economic Studies, Oxford Configuration and Intelligence,” Science, holds. Changes in factor shares inform econ- accounts for many countries and industries. outcomes. While I have described several University Press, vol. 57(1), pages 103– 192(4236), 1976, pp. 227–36; J. omists’ assumptions about aggregate produc- We demonstrate that, at the global level, of my own papers on the topic, a number 20, March 2011. Price, “Parent-Child Q uality Time: Loukas Karabarbounis is an tion technologies and their understanding the labor share has been declining since the of other researchers have also taken advan- Return to Text Does Birth Order Matter?” in Journal associate professor of economics of the state of product and labor markets. early 1980s.3 The decline has been broad- tage of newly available datasets in Florida 4 J. Rodgers, H. Cleveland, E. van of Human Resources, 43(1), 2008, at the University of Minnesota. The behavior of factor shares influences con- based. As shown in Figure 1, it occurred in and Denmark to examine the role of birth den Oord, and D. Rowe, “Resolving pp. 240–65; J.Lehmann, A. Nuevo- He is also a research consultant clusions about the implications of progress seven of the eight largest economies of the order on other important outcomes, specif- the Debate Over Birth Order, Family Chiquero, and M. Vidal-Fernandez, at the Federal Reserve Bank of in computing, robotics, and information world. It occurred in all Scandinavian coun- ically juvenile delinquency and later crimi- Size, and Intelligence,” American “The Early Origins of Birth Order Minneapolis and a research asso- technologies, the response and incidence of tries, where labor unions have traditionally nal behavior.13 Consistent with the work Psychologist, 55(6), 2000, pp. 599– Differences in Children’s Outcomes ciate in the NBER’s Economic changes in tax policies, and the dynamics of been strong. It occurred in emerging mar- discussed here, later-born children experi- 612. and Parental Behavior,” forthcoming in Fluctuations and Growth Program markups and . kets such as China, India, and Mexico that ence higher rates of delinquency and crim- Return to Text Journal of Human Resources. and International Finance and For many decades, the assumed stability have opened up to international trade and inal behavior; this is at least partly attribut- 5 S. Black, E. Gronqvist, and B. Ockert, Return to Text Program. He of factor shares — one of the “stylized facts” received outsourcing from developed coun- able to time of parents. “Born to Lead? The Effect of Birth Order 11 V. Hotz and J. Pantano, “Strategic serves as a member of the board of about growth codified by Nicholas Kaldor tries such as the . on Non-Cognitive Abilities,” NBER Parenting, Birth Order, and School editors of the American Economic in 1961 — meant that the modern macro- Where available, we use the labor share 1 G. Becker, “An Economic Analysis Working Paper No. 23393, May 2017. Performance,” NBER Working Paper No. Review and as an associate edi- economics literature paid little attention of income in the corporate sector as our of Fertility,” in Demographic and Return to Text 19542, October 2013, and Journal of tor of the Journal of Monetary to trends in the functional distribution of preferred measure of the labor share, as it Economic Change in Developed 6 L. Borghans, A. Duckworth, J. Population Economics, 28(4), 2015, pp. Economics. Prior to joining the income.1 Measurement challenges and the excludes many unincorporated enterprises Countries, New York, Columbia Heckman, and B. ter Weel, “The 911-936. University of Minnesota, he was absence of long time series for more than a and sole proprietors whose income is dif- University Press, 1960, pp. 209–40; Economics and Psychology of Personality Return to Text an associate professor of econom- small set of countries likely also played a role ficult to split between labor and capital. G. Becker and H. Lewis, “Interaction Traits,” Journal of Human Resources, 12 F. Sulloway, Born to Rebel: Birth ics at the ’s in dampening economists’ in the Further, our measure is not influenced by Between Q uantity and Q uality of 43, 2008, pp. 972–1059. Order, Family Dynamics, and Creative Booth School of Business. He has evolution of factor shares over time.2 the government sector, which lacks market Children,” in Economics of the Family: Return to Text Lives, New York, Pantheon Books, 1996. served as a senior research econo- Marriage, Children, and Human 7 S. Black, P. Devereux, K. Salvanes, Return to Text mist at the Federal Reserve Bank of Capital, 1974, pp. 81–90; G. Becker “Healthy (?), Wealthy, and Wise: 13 S. Breining, J. Doyle, D. Figlio, K. Minneapolis. Average Change in Labor Share, 1975–2012 and N. Tomes, “Child Endowments, and Birth Order and Adult Health, NBER Karbownik, J. Roth, “Birth Order and Karabarbounis’s research the Q uantity and Q uality of Children,” Working Paper No. 21337, July 2015. Delinquency: Evidence from Denmark are in macroeconomics, Percentage point change per decade Return to Text labor economics, and international 10 NBER Working Paper No. 123, February and Florida,” NBER Working Paper No. Brazil 1976. 8 L. Argys, D. Rees, S. Averett, and B. 23038, January 2017. finance. His latest research focuses Return to Text Return to Text on topics such as the global decline 5 South Korea Witoonchart, “Birth Order and Risky TurkeyGreat Britain in labor’s share of income, produc- tivity and capital flows in south- 0

ern Europe, cyclicality and disper- United StatesCanada Japan France −5 Italy Germany sion in labor market outcomes, and China the effects of insur- ance policy on macroeconomic −10 outcomes. He is a recipient of the −15 2016 Sloan Research Fellowship, Poland awarded by the Alfred P. Sloan Mexico Foundation. He received his −20 Ph.D. in Economics from Harvard Each bar represents one country. Sample includes all countries with at least 15 years of data University and an undergraduate Source: L. Karabarbounis and B. Neiman, NBER Working Paper No. 19136 degree from the Athens University of Economics and Business. Figure 1

18 NBER Reporter • No. 4, December 2017 NBER Reporter • No. 4, December 2017 19 prices for its output, or by the residen- for instance, might be important for capital-labor ratio in response to a per- explain the other half? We use related trend influencing the financ- tial sector (that has a labor share of specific countries but are unlikely to centage change in the relative cost of labor flows data to separate residual payments ing of global investment.10 Whereas in zero), whose share of the total GDP account for much of the overall trend and capital — is greater than one, the low- into payments to capital and economic 1980 funded most fluctuates for reasons potentially unre- that the world has experienced. ering of the cost of capital results in a profits, and find that the capital share did global investment, today corporate saving lated to technology or product market Global trends in the -added decline in the labor share. not rise as it should if capital-labor substi- accounts for nearly two-thirds of every structure.4 We have posted our coun- shares of various industries, referred Most prior estimates of the elasticity tution entirely accounted for the decline invested dollar. We measure corporate try-level data set online and it has been to as structural change, contribute to of substitution between capital and labor in the labor share. Rather, we note that saving as undistributed corporate profits, used in a number of studies. the decline in the labor share if indus- are based on time series variation within a increases in markups and the share of eco- which together with household and gov- The labor share declines occurred tries with lower labor share levels have country in factor shares and factor prices. nomic profits also played an important ernment saving equal . We in most U.S. states and, globally, in grown relative to industries with higher These estimates generally imply an elas- role in the labor share decline.9 use a combination of aggregate and firm- most industries, including manufactur- labor share levels. Most of the labor ticity of substitution below one. By con- level data to demonstrate that the decline ing, wholesale, and retail. Some have share decline — and most of the cross- trast, our estimates of this elasticity are Other Implications in the global labor share resulted in an suggested that the share of compensa- country variation in the labor share identified from cross-country and cross- increase in accounting profits. Since divi- tion in domestic product of depre- decline — is due to within-industry industry variation in trends in labor shares Beyond the conclusions about tech- dends did not keep pace with profits, cor- ciation, rather than in gross domes- declines. and investment price declines. We find nology and product that porate saving increased. tic product, is more informative about Another possible force contribut- that countries and industries with larger emerge, why else does the labor share The increase in corporate saving Brent Neiman is a research associate inequality between workers and capital- ing to the decline in the labor share is declines in investment prices experienced decline matter? The evolution of the labor was also pervasive at the global level and in the NBER’s International Finance and ists. In fact, while some exceptions exist, the substitution away from labor and larger declines in their labor shares, which share is a useful summary statistic for observed in all ten of the largest econo- Macroeconomics and International Trade most notably the United States, most toward capital in production. There leads to our estimate of an elasticity of consumption or welfare-based inequal- mies. Further, given that global corporate and Investment programs. He is a professor countries experienced similar trend was a decline in the price of investment substitution equal to 1.25. Taken together ity between a representative worker and investment has been relatively stable as a of economics at the University of Chicago’s declines in their labor shares regard- relative to consumption that acceler- with the observed decline in the relative capitalist. Some analyses focus on the share of GDP since 1980, the corporate Booth School of Business and served as an less of whether the share is measured ated globally around the same time price of investment, our estimates imply labor share in sector evolved from a net borrower to a associate editor of the American Economic as a fraction of net or gross domestic that the global labor share began its that this form of technological change net lender to the rest of the economy. The Review, the Q uarterly Journal of Economics, product.5 decline. A key hypothesis that we put accounts for roughly half of the decline in improvement in the net lending position and the Journal of . forward is that the decline in the rela- the global labor share.6 The Components of of the corporate sector fell into various Neiman conducts research on interna- Possible Explanations tive price of investment, often attrib- This elasticity — and the implied rela- Corporate Gross Value Added margins of adjustment, including reduc- tional macroeconomics, finance, and trade. uted to advances in information tech- tionship between capital-biased technical tions in debt, accumulation of cash, and Percentage of gross value added He previously served on the White House The labor share decline likely has nology, automation, and the computer change and the labor share — applies at 70% equity buybacks. Council of Economic Advisers as a staff multiple drivers. A key benefit of our age, caused a decline in the cost of capi- the industry or country level and is there-

for international finance and has focus on the global decline is that tal and induced firms to produce with fore inclusive of changes in economic Compensation to labor Next Steps worked at the Federal Reserve Bank of it restricts the set of explanations to greater capital intensity. If the elastic- activity across firms within industries or 60 Chicago, McKinsey & Company, and the those that operate on a global scale. ity of substitution between capital and across firms and industries within coun- The stability of the labor share of McKinsey Global Institute. Country-specific changes in policies, labor — the percentage change in the tries. Our hypothesis that progress with income is a key assumption built into In 2014, Neiman was one of the eight IT-related technologies has contributed 40 most modern macroeconomic models, economics professors in the United States to the decline in the labor share is, there- but recent evidence shows downward Gross saving and Canada to receive the Sloan Research Global Labor Share Trends by Industry, 1975–2012 fore, not inconsistent with the possibility trends in the labor share in the majority of Fellowship, an award given to early-career that most firms experience stable or even 20 countries and industries. Such trends are Payments to capital scientists. In 2009, he was named as one Average percentage point change per decade rising labor shares, while low labor share informative for the design of macroeco- 4 7 of 22 “Emerging Leaders” by the Chicago firms gained in market share. Taxes nomic models, for evaluating changes in Council of Global Affairs. We also demonstrate how the inclu- 0 corporate financial practices, for assessing 1980 1990 2000 2010 Neiman earned a Bachelor of Science 2 sion of multiple types of capital with het- inequality, and for designing monetary in Economics and a Bachelor of Applied erogeneous depreciation rates complicates and fiscal policies. A consensus remains Science, both summa cum laude, from the 0 the relationship between labor shares and Source: L. Karabarbounis and B. Neiman, elusive on the exact roles of factors such as University of Pennsylvania in 1999. In the user cost of capital. Further, while a NBER Working Paper No. 19136 technology, product market competition, 2000, he earned a master’s degree in math- -2 single elasticity suffices to relate trends in globalization, and housing, and we are ematical modeling from Oxford University, the labor share to trends in the user cost Figure 3 continuing our exploration of these issues where he studied as a Thouron fellow, -4 of capital when all capital can be bundled in U.S. and international data. and he earned a Ph.D. in economics from into a single type, this will not be the case while others emphasize the labor share in 2008. He joined the -6 for production functions with different in net domestic product. Which of the

Hotels 1 Chicago Booth faculty in 2008. Mining nesting of capital types and labor, such as two measures best approximates inequal- Some notable exceptions include Transport Agriculture Financial & Construction Outside the classroom, Neiman is an Manufacturing Public Services those posited in the literature on capital- ity depends on whether one studies tran- O. Blanchard, “The Medium Run,” Wholesale & Retail 8 enthusiastic golfer and was a bench warmer Business Services skill complementarity. Our continuing sitional dynamics or the steady state, as Brookings Papers on Economic Activity, on the 1998 Ivy League Champion golf Source: L. Karabarbounis and B. Neiman, NBER Working Paper No. 19136 work aims to further explore these issues. well as which shocks are driving the labor 2, 1997, pp. 89-158; O. Blanchard and team as an undergraduate. He also enjoys If technology explains half of the share decline. F. Giavazzi, “Macroeconomic Effects of travel and is always up for dim sum. Figure 2 global labor share decline, what might Our work also uncovers a closely Regulation and Deregulation in

20 NBER Reporter • No. 4, December 2017 NBER Reporter • No. 4, December 2017 21 and Labor Markets,” NBER Working a discussion of why even the corporate sec- 2017; M. Kehrig and N. Vincent, Paper No. 8120, February 2001, and tor’s labor share is not fully isolated from “Growing Productivity Without Growing NBER News Quarterly Journal of Economics, 118(3), the behavior of sole proprietors. Wages: The Micro-Level Anatomy of the August 2003, pp. 879–907; and C. Jones, Return to Text Aggregate Labor Share Decline,” Working “Growth, Capital Shares, and a New 5 See L. Karabarbounis and B. Neiman, Paper, 2017. Perspective on Production Functions,” “Capital Depreciation and Labor Shares Return to Text Working Paper, 2003. Around the World: Measurement and 8 See P. Krusell, L. Ohanian, J.-V. Rios- Awarded Nobel for Research on Return to Text Implications,” NBER Working Paper Rull and G. Violante, “Capital-Skill 2 In thinking about the cross-section, No. 20606, November 2014, and B. Complementarity and Inequality: A Richard Thaler of the University associate in the NBER’s Asset Pricing for example, D. Gollin, “Getting Income Bridgman, “Is Labor’s Loss Capital’s Macroeconomic Analysis,” Econometrica, of Chicago’s Booth School of Business, Program. In 1992, he and Robert Shares Right,” Journal of Political Gain? Gross Versus Net Labor Shares,” 68(5), September 2000, pp. 1029–53. an NBER research associate for more Shiller launched the NBER Working Economy, 110(2), 2002, pp. 458–74, Macroeconomic Dynamics, July 2017. Return to Text than 25 years, was awarded the 2017 Group on Behavioral Economics, which stressed the pitfalls in studying labor Return to Text 9 See M. Rognlie, “Deciphering the in Economic Sciences for has served as an important forum for shares without a careful accounting for 6 Similar conclusions are reached in Fall and Rise in the Net Capital Share: his research in behavioral economics. researchers in this field. He served as the mixed income earned by proprietors analyses of a different global data set Accumulation, or ?,” Brookings The award was announced in October, co-director of the group until 2016. and unincorporated businesses. By the in “International Monetary Fund, Papers on Economic Activity, 46(1), and Thaler delivered his prize lec- Thaler became the 27th current or late 1990s or early 2000s, few countries “Understanding the Downward Trend in spring 2015, pp. 1–69; S. Barkai, ture, “From Cashews to Nudges: The past NBER research affiliate to receive had long and consistent time series that Labor Income Shares,” World Economic “Declining Labor and Capital Shares,” Evolution of Behavioral Economics,” on the Nobel Prize: allowed for our preferred treatment of this Outlook, April 2017, pp. 121–72. Working Paper, 2017; and J. De December 8 in Stockholm. and Bengt Holmström, income. Return to Text Loecker and J. Eeckhout, “The Rise of [Lecture slides] 2016; , 2015; Lars Hansen Return to Text 7 This pattern can be found in sev- and the Macroeconomic The Royal Swedish Academy of and Robert Shiller, 2013; Alvin Roth, 3 L. Karabarbounis and B. Neiman, eral firm or plant-level analyses of U.S. Implications,” NBER Working Paper No. Sciences’ announcement of the prize 2012; Thomas Sargent and Christopher “The Global Decline of the Labor Share,” data, including D. Autor, D. Dorn, 23687, August 2017, for work elaborat- explains that Thaler “has incorporated Sims, 2011; , 2010; Paul NBER Working Paper No. 19136, L. Katz, C. Patterson, and J. Van ing on this rise in economic profits as it psychologically realistic assumptions Krugman, 2008; Edward C. Prescott and October 2013, and The Quarterly Reenen, “Concentrating on the Fall relates to the labor share. into analyses of economic decision- Finn Kydland, 2004; Robert F. Engle, Journal of Economics, 129(1), February of the Labor Share,” NBER Working Return to Text making. By exploring the consequences 2003; Joseph E. Stiglitz, 2001; James 2014, pp. 61–103. Paper No. 23108, January 2017, and 10 See P. Chen, L. Karabarbounis, and B. of limited rationality, social prefer- ing the study of household saving, the J. Heckman and Daniel L. McFadden, Return to Text Papers & Neiman, “The Global Rise of Corporate ences, and lack of self-control, he has formation of prices in financial markets, 2000; Robert C. Merton and Myron S. 4 While we view it as an improvement Proceedings, 107(5), May 2017, pp. Saving,” NBER Working Paper No. shown how these human traits system- the role of fairness in setting wages and Scholes, 1997; Robert E. Lucas, Jr., 1995; in this regard over the total labor share, 180–5; B. Hartman-Glaser, H. Lustig, 23133, March 2017, and Journal of atically affect individual decisions as prices, and the potential for “nudges” and the late: Dale Mortensen, 2010; see M. Smith, D. Yagan, O. Zidar, and and M. Zhang, “Capital Share Dynamics , 89, August 2017, well as market outcomes. to influence consumer behavior. The Robert W. Fogel, 1993; Gary S. Becker, E. Zwick, “Capitalists in the Twenty- When Firms Insure Workers,” NBER pp. 1–19. “His empirical findings and theo- Academy’s description of the ways in 1992; George J. Stigler, 1982; Theodore First Century,” Working Paper, 2017, for Working Paper No. 22651, October Return to Text retical insights have been instrumen- which Thaler’s work has been applied W. Schultz, 1979; , tal in creating the new and rapidly may be found here. 1976; and , 1971. expanding field of behavioral econom- A longer summary of the scientific In addition, six current or past mem- ics, which has had a profound impact contributions that underlie this award bers of the NBER Board of Directors on many areas of economic research and may be found here. have received the Nobel Prize: George policy.” Thaler is the Charles R. Walgreen Akerlof, 2001; , 1987; The Academy cited many set- Distinguished Service Professor of and the late: , 1996; tings in which behavioral insights have Economics and Behavioral Science , 1993; , enriched the research dialogue, includ- at the Booth School and a research 1981; and , 1970.

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