Transcript 1) What is the original paper about? 2) What have we done

According to author’s estimates, technology has caused relative price
of investments goods to decline by 25% respect to consumption
goods. Hence technology ultimately represent the main
(although not only) cause of labor share decline.
International trade, however is not to blame.
The decline in labor share also happens in “labour abundant countries” (i.e. India and China).
 Hence labour shares do not primarily decline due to outsourcing labour intensive activities
from advance to emerging countries.
Skill composition of the labour force is not an issue either
Separating skilled and unskilled labour input in the production function, and controlling for
changes in stock of skill labour relative to the stock of capital does not change the main
result.
Why does it matter ?
A falling labour share implies that productivity gains no longer translate into broad rises in
pay. Instead, an ever larger share of the benefits of growth accrues to owners of capital.
Policy implications change dramatically depending on the
source and nature of the decline
One of Kaldor's (1957) stylized fact is that: “The shares of national income received by
labor and capital are roughly constant over long periods of time”
However, since the 1980s, we observe a global labor share decline.
Globally, corporations paid about 65 percent of their income to labor (as opposed to capital) in 1975, compared
with about 60 percent in 2007. WHY?
The authors suggest that at least half of this decline is explained by the decline in the price of
investment goods relative to consumption goods (which are in turn determined by technology)
The authors focus on corporate labor share: Compensation paid to
labor divided by gross value added
Price of investment good:
In national accounts, investment are the purchase of machinery
(including software) and buildings (offices, infrastructure, dwellings)
and the constitution of stocks (inventories)
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𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑖
PI=
∗
1
𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒
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1
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑈𝑆
∗
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑈𝑆
𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑈𝑆
The authors build a a new dataset for 59 countries for various years
between 1975-2012 using country-level statistics on labor share in the
corporate sector:
 Five different sources are combined:
- country-specific Internet web pages
- digital files and physical books from the UN
- digital files and physical books from the OECD
- EU KLEMS dataset
Note: Although there are some differences in methodologies across
countries, the data conforms to SNA standards.
Year fixed effects from a regression of labor shares each year in the eight
largest economies that also absorbs country fixed effects.
Labor share declines were associated with increases in corporate profits and corporate
savings, which equal the portion of profits which were not paid out as dividends
Two-sectors (Final consumption good and Final investment good)
FINAL CONSUPTION GOOD: Competitive producers assemble the final consumption
good Ct using z, a continuum of intermediate inputs with technology:
ε is the elasticity of substitution between inputs varieties
FINAL INVESTMET GOOD: Competitive producers assemble the final investment good
Xt using z, a continuum of intermediate inputs with technology:
ξ is the technology level in the production of the
consumption good relative to the investment good
INTERMEDIATE INPUT: monopolistically competitive firms use capital and labor in a
CES production function:
HOUSEHOLDS (owner of all capital and labor): maximize utility under a budget constraint:
The model is solved according to a sequence:
First households maximise utility deciding the consumption, labor supply, bonds, and
investment.
Then final producers of the investment and final goods minimize cost
Then each producer of input maximizes profit
Finally, markets clear.
The share of income is given by
Wages
Rental of capital return
Profits
Estimation is based on a CES production function specification.
The FOC from this function, combined with the definitions of income shares (previous
slide) give the following expression for labor share:
Taking changes between two periods (t and t’):
Where: μ is the mark-up, SL=share of labor, Ak is capital augmenting technology, R is the
rate to which capital is rent.
All term with hat are %changes over time.
Based on the model described so far, the authors proceed at assessing the
cause of labor share decline in two steps:
 First, the elasticity of capital/labor substitution σ is estimated from
the following spécification of the labor share equation (in the CES
production function case, with μ=1, μhat=0, Akhat=0):
 Once σ is estimated (= 1.25), it is used as an input to solve the general
equilibrium model.
 The exercise is repeated with different extensions (addition of mark up,
capital goods with higher depreciation rates, capital augmenting
technology, skilled labor). I only present here the baseline case as the
other specifications do not change the results dramatically.
Cross section estimation of this equation with different datasets
The paper documents a decline in labor share (globally) matched by a
decline in the price of investment goods (due to technology), identified
as the main driver of the reduction in labor share.
Debate on main causes of labor share decline is not conclusive.
For example, Elsby et Al. “The Decline of the U.S. Labor Share” argue
that offshoring is the main cause of the decline.
Policy implications:
Should policy makers intervene (especially taking into account welfare
implications). If so, how?
Answers change according to main driver (technology/skill/globalization)
For example, some propose taxing capital to make capital more costly
relative to labor.
Other propose to not intervene: just wait for developing countries to
exhaust their “cheap labor” capacity.
Technology and price of investment goods are not modelled.
Not straightforward in the model, to see the channel through which
price of investment goods drives labor shares down (via R).
The representative household is both owner of the capital and
supplier of labor. The model could be extended to provide
macroeconomic implications of income distribution.