Trends in Factor Shares: Facts and Implications.

• Author: Karabarbounis, Loukas

The distribution of national income between capital and labor and the determinants of that split are important for many reasons. The evolution of factor shares over time affects income inequality across households. Changes in factor shares inform economists' assumptions about aggregate production technologies and their understanding of the state of product and labor markets. The behavior of factor shares influences conclusions about the implications of progress in computing, robotics, and information technologies, the response and incidence of changes in tax policies, and the dynamics of markups and competition.

For many decades, the assumed stability of factor shares--one of the "stylized facts" about growth codified by Nicholas Kaldor in 1961--meant that the modern macroeconomics literature paid little attention to trends in the functional distribution of income. (1) Measurement challenges and the absence of long time series for more than a small set of countries likely also played a role in dampening economists' interest in the evolution of factor shares over time. (2)

The Global Decline of the Labor Share

Our work builds on a dataset that we collected from national income and product accounts for many countries and industries. We demonstrate that, at the global level, the labor share has been declining since the early 1980s. (3) The decline has been broad-based. As shown in Figure 1, it occurred in seven of the eight largest economies of the world. It occurred in all Scandinavian countries, where labor unions have traditionally been strong. It occurred in emerging markets such as China, India, and Mexico that have opened up to international trade and received outsourcing from developed countries such as the United States.

Where available, we use the labor share of income in the corporate sector as our preferred measure of the labor share, as it excludes many unincorporated enterprises and sole proprietors whose income is difficult to split between labor and capital. Further, our measure is not influenced by the government sector, which lacks market prices for its output, or by the residential sector (that has a labor share of zero), whose share of the total GDP fluctuates for reasons potentially unrelated to technology or product market structure. (4) We have posted our country-level data set online and it has been used in a number of studies.

The labor share declines occurred in most U.S. states and, globally, in most industries, including manufacturing, wholesale, and retail. Some have suggested that the share of compensation in domestic product net of depreciation, rather than in gross domestic product, is more informative about inequality between workers and capitalists. In fact, while some exceptions exist, most notably the United States, most countries experienced similar trend declines in their labor shares regardless of whether the share is measured as a fraction of net or gross domestic product. (5)

Possible Explanations

The labor share decline likely has multiple drivers. A key benefit of our focus on the global decline is that it restricts the set of explanations to those that operate on a global scale. Country-specific changes in policies, for instance, might be important for specific countries but are unlikely to account for much of the overall trend that the world...