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Macroeconomic Risk and the Labor Share of Income
Gregor Schubert
June 27, 2014
Gregor Schubert Macroeconomic Risk and the ...
Motivation
In the mid-20th century, economists considered it an empirical
‘stylized fact’ that labor shares of income were...
Motivation
-6-4-202
1975 1980 1985 1990 1995 2000 2005 2010
Corporate LS Total LS
Change in the Labor Share since 1975 (in...
Motivation
Several different explanations have been advanced to explain these
changes in the labor share:
Capital account o...
This Paper
1 Develops a tractable theoretical model of the determination of the
labor share of income, incorporating risk ...
Theoretical Model - Key Assumptions
Both workers and capital investors are risk-averse
Workers’ household income comes fro...
Theoretical Results
1 Higher inflation risk leads to a lower labor share of income
Workers demand higher risk premium propo...
Theoretical Results
2 Higher covariance between inflation and productivity growth leads to
a lower labor share of income
Ca...
Theoretical Results
3 Higher out-of-work benefits lead to a higher labor share of income.
Higher wage demanded at every lev...
Empirical Strategy
Data:
Unbalanced panel of 18 OECD countries for 1975-2010
Focus on corporate labor share (CLS) to avoid...
Empirical Results
Estimated effects of the macro-risk factors on the labor share are
consistently negative and statisticall...
Conclusions
1 Macroeconomic risk affects the labor share of income
Macroeconomic policy may matter for distribution questio...
Thank you for your attention!
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 13 / 23
Appendix
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 14 / 23
Labor Supply
Workers decide between working and receiving uncertain real income
that varies with inflation, or certain bene...
Labor Demand and Capital Risk Premium
Capital investors receive returns that are a function of profits, and
therefore of in...
Labor Share of Income
We can write the labor share of income in the following way:
sL,t =
LIt
Yt
=
LIt
w∗
t L∗
t
w∗
t L∗
t...
Extension: Labor Force Participation Rate
Theoretical Predictions:
1 Higher inflation risk leads to a lower labor force par...
Empirical Results: Risk and the Labor Share Table
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27...
Empirical Results: Robustness Checks Table
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 ...
Empirical Results: Labor Force Participation Table
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 2...
Labor Share for Biggest OECD Economies
55606570
LaborShare
1975 1980 1985 1990 1995 2000 2005 2010
Year
United States
5055...
Summary Statistics
Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 23 / 23
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Macroeconomic Risk and the Labor Share of Income (Slides)

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Barcelona GSE Master Project by Gregor Schubert

Master Program: Economics

About Barcelona GSE master programs: http://j.mp/MastersBarcelonaGSE

Published in: Economy & Finance
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Transcript of "Macroeconomic Risk and the Labor Share of Income (Slides)"

  1. 1. Macroeconomic Risk and the Labor Share of Income Gregor Schubert June 27, 2014 Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 1 / 23
  2. 2. Motivation In the mid-20th century, economists considered it an empirical ‘stylized fact’ that labor shares of income were constant (e.g. Kaldor (1961)) “For a long time, the idea accepted by most economists and uncritically repeated in textbooks was that the relative shares of labor and capital in national income were quite stable over the long run.” – Thomas Piketty (2014), “Capital in the Twenty-First Century” In theory, Cobb-Douglas production function with competitive factor markets implies constant factor shares of income BUT: Recent data show large variations in the labor share both within and between countries (e.g. Karabarbounis & Neiman (2014)) Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 2 / 23
  3. 3. Motivation -6-4-202 1975 1980 1985 1990 1995 2000 2005 2010 Corporate LS Total LS Change in the Labor Share since 1975 (in ppt) Source: Author’s calculation based on data from Karabarbounis & Neiman (2014) Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 3 / 23
  4. 4. Motivation Several different explanations have been advanced to explain these changes in the labor share: Capital account openness (e.g. Jayadev(2007)) and trade shares (Harrison (2005)) Relative price of investment goods (Karabarbounis & Neiman (2014)) Decline in Unionization and rise of offshoring (Elsby et al. (2013)) This paper provides a new explanation based on changes in macroeconomic risk over time Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 4 / 23
  5. 5. This Paper 1 Develops a tractable theoretical model of the determination of the labor share of income, incorporating risk premia for macroeconomic fluctuations into factor supply functions 2 Identifies two macro-risk factors that should affect the labor share: Inflation variance Covariance of inflation and productivity shocks 3 Tests the predicted effect of these macro-risk factors empirically in cross-country panel of OECD countries (1975-2010) Compares alternative explanations for variations in the labor share against macro-risk story Explores impact of macro-risk factors on labor force participation rate Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 5 / 23
  6. 6. Theoretical Model - Key Assumptions Both workers and capital investors are risk-averse Workers’ household income comes from wages, while capital investors’ income depends on firm profitability and aggregate productivity shocks CES production technology with low elasticity of substitution (σ < 1): Yt = θt (1 − α)L σ−1 σ t + αK σ−1 σ t σ σ−1 Nominal wages are determined in advance before inflation shocks are observed Workers are heterogeneous with regard to risk aversion and firms can wage-discriminate between workers based on reservation wage Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 6 / 23
  7. 7. Theoretical Results 1 Higher inflation risk leads to a lower labor share of income Workers demand higher risk premium proportional to their risk aversion Difference between marginal wage and average wage increases, which decreases the non-capital share of income going to labor LD LS(σ2 π,3) LS 2(σ2 π,2) LS 1(σ2 π,3) L∗ 2 w∗ 2 Ut LI2 Labor Force Wage Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 7 / 23
  8. 8. Theoretical Results 2 Higher covariance between inflation and productivity growth leads to a lower labor share of income Capital investors demand higher risk premium because single firm profits become more correlated with the overall portfolio performance Capital share of income increases with rental rate due to low elasticity of substitution LD 2 (r2) LD 1 (r1) LS L∗ 2 w∗ 2 Ut LI2 Labor Force Wage Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 8 / 23
  9. 9. Theoretical Results 3 Higher out-of-work benefits lead to a higher labor share of income. Higher wage demanded at every level of risk aversion raises non-capital share of income due to low elasticity of substitution Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 9 / 23
  10. 10. Empirical Strategy Data: Unbalanced panel of 18 OECD countries for 1975-2010 Focus on corporate labor share (CLS) to avoid measurement issues for unincorp. businesses Estimation: IV regression in first differences, instrumenting for lagged diff. of CLS using 2nd and 3rd lags of CLS and unemp. rate Specification sL,t = δ0 + δ1sL,t−1 + δ2σθ,π,t + δ3σπ,t + δ4Ut + β Xt + ui + t sL,t: Labor share of income (in %) σθ,π,t: Covariance of RGDP growth and CPI inflation (5 years trailing) σπ,t: Standard deviation of CPI inflation (5 years trailing) Ut: Social expenditures (% of GDP) Xt: Control variables (e.g. GDP(PPP) per cap., Population, Risk-free interest rate) ui : Country-fixed effect Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 10 / 23
  11. 11. Empirical Results Estimated effects of the macro-risk factors on the labor share are consistently negative and statistically and economically significant Results are robust to controlling for alternative drivers of CLS variations: Trade Share, Cap. Acc. Openness, Union Density, Relative Price of Inv. Goods A one standard deviation (SD) increase in inflation risk decreases the labor share by 1.3-2.0 ppt (0.4-0.6 SD) A one SD increase in the covariance risk decreases the labor share by 1.6-1.9 ppt (0.5-0.6 SD) Higher social expenditures increase the labor share Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 11 / 23
  12. 12. Conclusions 1 Macroeconomic risk affects the labor share of income Macroeconomic policy may matter for distribution questions 2 Changes in the labor share may reflect changing risk premia Variations in the labor share can be neutral for worker welfare Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 12 / 23
  13. 13. Thank you for your attention! Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 13 / 23
  14. 14. Appendix Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 14 / 23
  15. 15. Labor Supply Workers decide between working and receiving uncertain real income that varies with inflation, or certain benefits of not-working. Standard intertemporal optimization with CRRA utility implies that workers with consumption process ∆ct+1 ct = δ0 − δ1νt+1 - where νt+1 is an inflation shock - demand a risk premium such that the real wage is E[wR t+1] ≈ Ut+1 + wN t+1γRβδ1σ2 π,t+1 where Ut is the value of not-working, γ is the degree of risk aversion, R is the risk-free IR, β is the discount factor, and σ2 π,t is the variance of inflation shocks Assuming that workers are uniformly distributed over risk aversion, such that kL = γ, the labor supply will be given by LS t = wN t − Ut wN t kRβδ1σ2 π,t Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 15 / 23
  16. 16. Labor Demand and Capital Risk Premium Capital investors receive returns that are a function of profits, and therefore of inflation shocks (e.g. dividends): Rt+1 = Et[Rt+1] + ρ1νt+1 Standard intertemporal optimization with CRRA utility and investor consumption process ∆ck t+1 ck t = τ0 + τ1 t+1 - where t+1 is an aggregate productivity shock - imply a rental rate of capital of Et[rt+1] = Et[Rt+1] − 1 = R − 1 + γβRρ1τ1σπ,θ,t+1 where ρ1,τ1 are positive constants, and σ2 π,θ,t is the covariance of inflation and productivity shocks Taking first-order conditions of standard profit maximization problem for the firm, we can then find the labor demand function to be LD t = Yt θt (1 − α) + α α 1 − α σ−1 w∗ t rt σ−1 σ 1−σ Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 16 / 23
  17. 17. Labor Share of Income We can write the labor share of income in the following way: sL,t = LIt Yt = LIt w∗ t L∗ t w∗ t L∗ t Yt = LIt w∗ t L∗ t (1 − sK,t) Then, we use the FOC of the firm to replace sK,t and integrate over wage demand curve to find LIt After simplifying, the labor share is given by sL,t = (1 − r1−σ t (αθt)σ )Ut ln w∗ t Ut (w∗ t − Ut)−1 Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 17 / 23
  18. 18. Extension: Labor Force Participation Rate Theoretical Predictions: 1 Higher inflation risk leads to a lower labor force participation rate (LFPR) 2 Higher covariance risk leads to a higher LFPR 3 Higher out-of-work benefits lead to a lower LFPR Empirical Results: Estimated inflation risk coefficient is robustly negative Results for covariance risk and benefits have the right sign but are not significant All three effect sizes are small empirically Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 18 / 23
  19. 19. Empirical Results: Risk and the Labor Share Table Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 19 / 23
  20. 20. Empirical Results: Robustness Checks Table Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 20 / 23
  21. 21. Empirical Results: Labor Force Participation Table Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 21 / 23
  22. 22. Labor Share for Biggest OECD Economies 55606570 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year United States 505560 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year Japan 55606570 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year Germany 55606570 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year United Kingdom 5560657075 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year France 50556065 LaborShare 1975 1980 1985 1990 1995 2000 2005 2010 Year Italy Labor Share of Income in Large OECD Economies Source: Author’s calculation based on data from Karabarbounis & Neiman (2014) Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 22 / 23
  23. 23. Summary Statistics Gregor Schubert Macroeconomic Risk and the Labor Share of Income June 27, 2014 23 / 23
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