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Title: Capital-Task Complementarity and the Decline of the US Labor Share of Income
Citation Type: Miscellaneous
Publication Year: 2016
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Abstract: This paper studies how technology-driven changes in occupational composition of the labor force contributed to the recent decline of the U.S. labor share of income. Estimating an aggregate production function for the U.S. economy consistent with job and wage polarization trends, I show that changes in the occupational composition of the total wage bill have been the single driver of the trend decline in the labor share since 1967. This direct link between the labor share and the composition of the wage bill results from the combination of unitary elasticity between equipment capital and non-routine tasks, and high substitutability between equipment capital and routine tasks. Embedding the estimated production technology within a general equilibrium model with occupational choice, I document that the fall in relative equipment-capital prices alone can explain 72 percent of the decline of the labor share for the 1967-2013 period. The model also demonstrates that the effect of permanent technology shocks on the labor share shrinks as the fraction of routine task labor declines. As a result, the labor share is predicted to stabilize at around 55 percent in the long run, even if technological progress continues at its current pace. In addition, I find that differences in labor share trends across sectors can be accounted for by varying sensitivities of cost of production to the price of equipment capital. Finally, repeating the estimation analysis using an education-based classification of skill reveals that the theory based on capital-task interactions substantially improves on the traditional capital-skill complementarity theory in understanding the decline of the labor share.
Url: http://www.musaorak.com/wp-content/uploads/2016/12/orak_laborshare_sumbission.pdf
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Authors: Orak, Musa
Publisher: Federal Reserve Board of Governors
Data Collections: IPUMS CPS
Topics: Labor Force and Occupational Structure
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