Friday, July 10, 2015

Why labor's share of income is falling: another take

Labor's share of gross domestic product has dropped from 66 to 61 percent over the last 20 years, contributing significantly to income inequality.  Most experts (myself included) have focused on globalization, technological change, and labor market institutions such as collective bargaining and the minimum wage as contributing factors.

Harvard economist Robert Lawrence has written a provocative paper about that suggests another strong possibility: that capital investment (structures, equipment, software and the like) has lagged and as a result labor income has declined as a share of GDP.  The story goes like this: technical change has augmented labor instead of capital; in other words, one person can now do the work of two or more persons.  If accompanied by inelastic demand, this increase in the effective supply of labor results in lower labor income.  Another key part of Lawrence's study: labor and capital are complements, not substitutes.

This runs completely counter to the view promoted by Piketty that capital growth has resulted in income redistribution.  Piketty recommends income redistribution through wealth taxes.  Lawrence's results imply the exact opposite -- we need to take measures to increase capital formation in order to help labor.

No comments:

Post a Comment