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November 10, 2015 Slow Capital Accumulation and the Decline in Labor’s Share of Output Filippo Occhino Since capital and labor tend to be complementary in the production of goods and services, the same factors that have slowed down capital accumulation since the early 2000s may have weakened businesses’ labor demand and may have decreased the labor share. The labor share of output—the ratio of labor compensation to output—has trended downward for decades, but it has declined at a faster rate since the early 2000s. The labor share in the nonfarm business sector hovered around 64 percent in the 1950s, declined to 61.4 percent in 2002, and dropped more rapidly thereafter. It is currently close to 57 percent. Labor Share Labor compensation as a percent of output 67 65 63 61 A declining labor share means that wages grow less than productivity. Since the early 2000s, wages have risen much more slowly than productivity. Since 2002, real compensation per hour in the nonfarm business sector has grown at an average annualized rate of 0.73 percent, while productivity has grown at an average annualized rate of 1.79 percent. According to Karabarbounis and Neiman (2013), the decrease in the relative price of investment goods, partly due to progress in information and communication technologies, has induced firms to replace labor with capital, thereby reducing the labor share. Elsby, Hobijn and Sahin (2013) find that part of the long-term 59 57 55 1947 1955 1963 1971 1979 1987 1995 2003 Notes: Nonfarm business sector. Shaded bars indicate recessions. Sources: Bureau of Labor Statistics; Haver Analytics. 2011 decline in the labor share may be explained by the offshoring of labor-intensive production processes, which has led to a higher capital-labor ratio in U.S. production, and a lower labor share. Lawrence (2015a and 2015b), however, points out that the labor share decline may be connected with a lower, rather than a higher, capital-labor ratio. Most estimates suggest that capital and labor tend to be complementary in the production of goods and services, which means that production requires the use of both capital and labor together, and it is difficult to substitute capital for labor or labor for capital. When capital and labor are complementary, a decrease in the capital-labor ratio is associated with a contraction in businesses’ demand for labor, which leads to a plunge in the wage rate and to a decline in the labor share. Lawrence then connects the labor share decline with a lower effective capital-labor ratio induced by labor-augmenting technological progress—a type of technological progress that raises the productivity of labor relative to capital and encourages businesses to substitute labor for capital. Lawrence’s argument suggests that the steeper decline of the labor share since the early 2000s may be connected with the slowdown of capital growth in those years. Capital services, which grew at an average rate of 4.3 percent annually before 2002, have since grown only 2.2 percent annually on average. Capital services per hour, an indicator of the capitallabor ratio, grew at an average rate of 2.89 percent annually before 2002, but have since grown 2.05 percent annually on average. Depending on the strength of the complementarity between capital and labor, a given decrease in the growth rate of the capital-labor ratio can be associated with a sizeable decline in the labor share. For instance, if we use an empirically plausible value for the strength of complementarity (an elasticity of substitution equal to 0.5), then a decrease in the capital-labor ratio of, say, 10 percent translates into a decrease in the labor share of approximately 2.5 percentage points, all else constant. This suggests that the same factors that have slowed down capital accumulation since the early 2000s may have also weakened businesses’ labor demand, leading to a faster decline in the labor share and a wider gap between wage growth and productivity growth. One such factor could be the deceleration of multifac- Real Wage and Productivity Index, 2000:Q1=100 140 Real output per hour 120 Real compensation per hour 100 80 60 40 20 1947 1955 1963 1971 1979 1987 1995 2003 2011 Notes: Nonfarm business sector. Shaded bars indicate recessions. Both series scaled to 100 in 2000:Q1. Sources: Bureau of Labor Statistics; Haver Analytics; author’s calculations. Capital Services Percent annual growth rate 7 6 5 4 3 2 1 0 1949 1957 1965 1973 1981 1989 Note: Nonfarm business sector. Sources: Bureau of Labor Statistics; Haver Analytics. 1997 2005 2013 tor productivity. Since 2005, multifactor productivity has grown 0.58 percent annually on average, more than a percentage point slower than in the previous 1996-2004 period, which was characterized by fast productivity growth. Multifactor Productivity Percent annual growth rate 3 References Elsby, Michael W. L., Bart Hobijn, and Aysegul Sahin (2013). “The 2 Decline of the U.S. Labor Share,” Brookings Papers on Economic 1 Activity. Karabarbounis, Loukas and Brent Neiman (2013). “The Global Decline of the Labor Share,” NBER Working Paper No. 19136. Lawrence, Robert Z. (2015a). “Recent Declines in Labor’s Share in US Income: A Preliminary Neoclassical Account,” NBER Working Paper No. 21296. 0 -1 -2 1985 1989 1993 1997 2001 2005 2009 2013 Note: Nonfarm business sector. Sources: Bureau of Labor Statistics; Haver Analytics. Lawrence, Robert Z. (2015b). “Explaining recent declines in labour’s share in US income,” VoxEU.org. Filippo Occhino is a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland. His primary areas of interest are monetary economics and macroeconomics and his recent research has focused on the interaction between the risk of default in the corporate sector and the business cycle. Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland. Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited. If you’d like to subscribe to a free e-mail service that tells you when Trends is updated, please send an empty email message to econpubs-on@mail-list.com. No commands in either the subject header or message body are required. ISSN 0748-2922
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