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Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Labor Sha...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
(1) Gradu...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
US LABOR ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
ROADMAP:
...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Labor Sha...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
One of th...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
US LABOR ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IPP CAPIT...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IPP AND T...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IPP DIFFE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
DATA CONS...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
DATA CONS...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
HOW DOES ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE RATE ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
• We find ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
EFFECTS O...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
EFFECTS O...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE IPP C...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
VINTAGE L...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
VINTAGE L...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
VINTAGE L...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
VINTAGE L...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
VINTAGE L...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
OUR TWO F...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IMPLICATI...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
1975-2010...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CONCLUSIO...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
WHAT NEXT...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
STRUCTURA...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Redistrib...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE LABOR...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
How Much ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
An intere...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
EFFECTS O...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
EFFECTS O...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CONCLUSIO...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
The Shape...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE SHORT...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
OUR IDEA:...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Theorem 1...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IDENTIFIC...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
MATCHING ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
MATCHING ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE DYNAM...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CYCLICAL ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
OUR CONCL...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Thanks!
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Appendix
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
AGGREGATE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
(a) Depre...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
US LABOR ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE IPP C...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
DECOMPOSI...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
DECOMPOSI...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
DECOMPOSI...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
SOFTWARE,...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
PRIVATE A...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
INVESTMEN...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CORPORATE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CORPORATE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CORPORATE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
LS AND IP...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
... BY SU...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
ADDING AD...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
More Stuff
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CAPITAL I...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CAPITAL T...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
ROBUSTNES...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE TRADI...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
THE NET R...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
PROPRIETO...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
CORPORATE...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
PRE- VS. ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
LS DECLIN...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
IPP CAPIT...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
TWO-STEP ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Then, giv...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
Ct AND ρ
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
TWO-STEP ...
Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt
STRUCTURA...
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Labor Share in the Long and the Short Run

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Raül Santaeulàlia-Llopis (MOVE, UAB and Barcelona GSE)

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Labor Share in the Long and the Short Run

  1. 1. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Labor Share in the Long and the Short Run Ra¨ul Santaeul`alia-Llopis MOVE-UAB and Barcelona GSE Barcelona GSE Trobada October, 2016
  2. 2. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt (1) Graduate textbooks: The labor share is relatively constant Sargent and Ljungqvist, Mankiw, Romer, Chad Jones, Acemoglu, ... (2) This notion about the constancy of labor share is not new: Labor share is “... is one of the great constants of nature, like velocity of light or the incest taboo.” R. Solow (1958). The constancy of labor share is “a bit of a miracle.” J. M . Keynes (1939). The constancy of labor share is at the core of the Kaldor facts.
  3. 3. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt US LABOR SHARE (LS), BEA 1947-2013
  4. 4. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt ROADMAP: (1) The Long Run: An explanation for the US labor share decline: IPP Capital (work with D. Koh and Y. Zheng). (2) The Short Run: The cyclicality of the labor share matters. (a) Labor share overshoots reducing the ability of the RBC model to generate fluctuations in hours (w/ J.-V. R´ıos-Rull) (b) SVARs with long-run restrictions and cyclically moving factor shares imply a large role for productivity shocks. (c) A countercyclical elasticity of substitution, σt, explains labor market dynamics very well (work with D. Koh).
  5. 5. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Labor Share Decline and Intellectual Property Products Capital Dongya Koh 1 Ra¨ul Santaeul`alia-Llopis 2 Yu Zheng 3 1University of Arkansas 2MOVE-UAB and Barcelona GSE 3City University of Hong Kong European University Institute Barcelona GSE Trobada October, 2016
  6. 6. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt One of the great fantasies of contemporary macroeconomics is finally gone: The LS declines. Our two findings: (1) The LS decline is twice as large as previously reported. Previous: Elsby, Hobijn, & Sahin ’13, Karabarbounis & Neiman ’14 (2) The decline of the LS is entirely explained by Intellectual Property Products (IPP) capital. Our findings have essential implications for the US model
  7. 7. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt US LABOR SHARE (LS), BEA 1947-2013
  8. 8. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IPP CAPITAL AND BEA REVISIONS SINCE 1999 • Before the 1999 BEA revision, IPP items were treated as expenditures in intermediate non-durable goods. • Two recent BEA revisions capitalize IPP: The 1999 revision capitalizes software. The 2013 revision capitalizes R&D and artistic originals. • These are important improvements in the measurement of aggregate investment, capital, and income. Corrado, Haltinwanger, and Sichel (2009), McGrattan and Prescott (2010,14), Akcigit, Celik, and Greenwood (2015).
  9. 9. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IPP AND TRADITIONAL INVESTMENT SHARES, BEA 1947-2013
  10. 10. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IPP DIFFERS FROM TRADITIONAL CAPITAL IN THREE DIMENSIONS (a) Investment (b) Price of Invesment (c) Depreciation Rate Aggregate Effects By IPP item
  11. 11. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt DATA CONSTRUCTION OF THE AGGREGATE LS We apply a standard definition to national income data (BEA): (e.g., Cooley and Prescott 1995, Krueger 1999, Gomme and Rupert 2007) • Unambiguous Capital Income (UCI) = Rental Income + Corporate Profits + Net Interest + Current Surplus Government Enterprises • Unambiguous Labor Income (ULI) = Compensation of Employees • Unambiguous Income (UI) = UCI + DEP + ULI
  12. 12. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt DATA CONSTRUCTION OF THE AGGREGATE LS (CONTINUED) • Ambiguous Income (AI) = Proprietors’ Income + Taxes on Production − Subsidies + Business Current Transfers Payments + Statistical Discrepancy • Ambiguous Capital Income (ACI) = UCI+DEP UI × AI. • Capital Income = UCI + DEP + ACI • Labor Share = 1 − Capital Share = 1 − Capital Income y
  13. 13. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt HOW DOES IPP CAPITAL AFFECT LABOR SHARE? (1) Labor share from the current BEA accounts: LS = 1 − RTkx T + RIPPkx IPP y , where traditional capital income is RTkx T and IPP capital income is RIPPkx IPP. (2) Labor share without IPP capital (∼ pre-1999 BEA): LST = 1 − RTkx T y − RIPPkx IPP , where capital income has only the traditional component.
  14. 14. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE RATE OF RETURN TO CAPITAL The FOCs of each type of capital j imply, Rj = 1 vj (1 + r ) − 1 vj (1 − δj), (1) where r is the interest rate (or net rate of return). Recall that we know vj and δj directly from the data.
  15. 15. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt • We find r using the model definition of LS: LS = 1 − RT(r, vT, δT)kx T + RIPP(r, vIPP, δIPP)kx IPP y , in which r is the only unknown (per year). • Given r, and hence an Rj for each j, we can remove (in a purely accounting sense) the effects of IPP capital on LS as: LST = 1 − RTkx T y − RIPPkx IPP ,
  16. 16. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt EFFECTS OF IPP CAPITAL ON THE LS, US 1947-2013
  17. 17. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt EFFECTS OF IPP CAPITAL ON THE LS, US 1947-2013 LS 1929-2013
  18. 18. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE IPP CAPITAL SHARE OF INCOME 1929-2013
  19. 19. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt VINTAGE LABOR SHARE: ONLY SOFTWARE WAS CAPITALIZED PRE-2013 BEA REVISION ERA
  20. 20. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt VINTAGE LABOR SHARE: ONLY SOFTWARE WAS CAPITALIZED PRE-2013 BEA REVISION ERA
  21. 21. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt VINTAGE LABOR SHARE: ONLY SOFTWARE WAS CAPITALIZED PRE-2013 BEA REVISION ERA
  22. 22. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt VINTAGE LABOR SHARE: WHEN IPP WAS NOT CAPITALIZED PRE-1999 BEA ERA
  23. 23. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt VINTAGE LABOR SHARE: WHEN IPP WAS NOT CAPITALIZED PRE-1999 BEA ERA
  24. 24. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt OUR TWO FINDINGS (1) The LS decline is twice as large as previously reported. (2) The entire decline of the LS is accounted for by Intellectual Property Products (IPP) capital. The US is undergoing a transition to a more IPP capital intensive economy. Decomposition and Robustness
  25. 25. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IMPLICATIONS FOR THE US MODEL We consider a degree of substitutability ρ between IPP and T capital: Yt = At  αk K ρ−1 ρ IPP,t + K ρ−1 ρ T,t ρ ρ−1 σ−1 σ + αhH σ−1 σ t   σ σ−1 , that we can conveniently write as, Yt = At αk (CtKT,t) σ−1 σ + αhH σ−1 σ t σ σ−1 , where Ct = KIPP,t KT,t ρ−1 ρ + 1 ρ ρ−1 , is driven by IPP-capital deepening (w.r.t. traditional capital). Two-Stage Estimation
  26. 26. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt 1975-2010 Full Sample Elasticity σ: (a) Aggregate Model 1.139∗∗∗ 1.137∗∗∗ (b) Traditional Model 1.049 1.034 • The long-standing Cobb-Douglas paradigm is consistent with the trendless behavior of the traditional LS... BUT this is NOT the case anymore with IPP capital. • IPP capital deepening generates the decline of the LS with σ > 1.
  27. 27. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CONCLUSION • The US LS decline is: (1) Large and prolonged (more than you think!) (2) Fully accounted for by the rise of IPP capital. • Essential implications for the US Model: The LS decline reflecs an ongoing structural shift to a more IPP-capital intensive economy.
  28. 28. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt WHAT NEXT? • We are conducting multicountry analysis (31 OECD countries) with promising preliminary results. Stay tuned!
  29. 29. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt STRUCTURAL SHIFT TO LARGER IPP-CAPITAL SHARE CROSS-COUNTRY EVIDENCE (PRELIMINARY WORK WITH D. KOH AND S. AUM) (a) Investment Shares (b) Depreciation Rates (c) IPP Capital Share of Income
  30. 30. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Redistributive Shocks and Productivity Shocks Jos´e-V´ıctor R´ıos-Rull 1 Ra¨ul Santaeul`alia-Llopis 2 1UPenn, UMinn, UCL, CAERP, CEPR, NBER 2MOVE-UAB and Barcelona GSE Barcelona GSE Trobada October, 2016
  31. 31. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE LABOR SHARE OVERSHOOTS Exogenously introducing this overshooting into the standard RBC model increases the income effect and reduces the power of productivity shocks in explaining fluctuations in hours.
  32. 32. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt How Much Are SVARs with Long-Run Restrictions Missing Without Cyclically Moving Factor Shares Ra¨ul Santaeul`alia-Llopis MOVE-UAB and Barcelona GSE Barcelona GSE Trobada October, 2016
  33. 33. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt An interesing and more direct approach to understand the effects of productivity shocks is Gal´ı (1999) and Fisher (2006). Question: What is the ability of productivity (and investment) shocks when we incorporate cyclically moving factor shares? We do so with a redistributive shock, same identification as in R´ıos-Rull and Santaeul`alia-Llopis (2010)
  34. 34. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt EFFECTS OF PRODUCTIVITY SHOCKS ON HOURS -0.200 -0.100 0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 0 5 10 15 20 25 30 35 40 45 50 SFEVD of Hours to Productivity Shocks, U.S. Pre-1973.IV Constant Factor Shares Nonconstant Factor Shares -0.200 -0.100 0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 0 5 10 15 20 25 30 35 40 45 50 SFEVD of Hours to Productivity Shocks, U.S. Post-1974.I Constant Factor Shares Nonconstant Factor Shares -0.010 -0.005 0.000 0.005 0.010 0 5 10 15 20 25 30 35 40 45 50 Response of Hours to Productivity Shocks, U.S. Pre-1973.IV Constant Factor Shares Nonconstant Factor Shares -0.005 0.000 0.005 0.010 0.015 0 5 10 15 20 25 30 35 40 45 50 Response of Hours to Productivity Shocks, U.S. Post-1974.I Constant Factor Shares Nonconstant Factor Shares
  35. 35. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt EFFECTS OF INVESTMENT SHOCKS ON HOURS -0.200 -0.100 0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 0 5 10 15 20 25 30 35 40 45 50 SFEVD of Hours to Investment Shocks, U.S. Pre-1973.IV Constant Factor Shares Nonconstant Factor Shares -0.200 -0.100 0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 0 5 10 15 20 25 30 35 40 45 50 SFEVD of Hours to Investment Shocks, U.S. Post-1974.I Constant Factor Shares Nonconstant Factor Shares -0.010 -0.005 0.000 0.005 0.010 0 5 10 15 20 25 30 35 40 45 50 Response of Hours to Investment Shocks, U.S. Pre-1973.IV Constant Factor Shares Nonconstant Factor Shares -0.005 0.000 0.005 0.010 0.015 0 5 10 15 20 25 30 35 40 45 50 Response of Hours to Investment Shocks, U.S. Post-1974.I Constant Factor Shares Nonconstant Factor Shares
  36. 36. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CONCLUSION • Cyclically moving labor share matters for the assessment of the role of productivity and investment shocks identified using long-run restrictions. • This is not about the size of the shocks, but about the behavior of the dynamic multipliers (a propagation mechanism). The overshooting property of labor share plays an important role in these effects.
  37. 37. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt The Shape of the Aggregate Production Function over the Business Cycle and Its Implications for the Labor Marke Dongya Koh 1 Ra¨ul Santaeul`alia-Llopis 2 1University of Arkansas 2MOVE-UAB and Barcelona GSE Barcelona GSE Trobada October, 2016
  38. 38. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE SHORT-RUN AGGREGATE ELASTICITY OF SUBSTITUTION IS COUNTERCYCLICAL (1) (2) (3) (4) σ 0.765*** 0.685*** 0.739*** 0.683*** (0.033) (0.026) (0.031) (0.026) γ1 -0.170* -0.276*** -0.240** -0.311*** (0.097) (0.091) (0.096) (0.093) α 0.831*** 0.801*** (0.024) (0.025) γ2 -7.379*** -4.969*** (1.282) (1.293) Obs. 264 264 264 264
  39. 39. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt OUR IDEA: A SR-LR AGGREGATE PRODUCTION FUNCTION: The SR-LR production function is: yt =    (1 − α) kt k∗ t σt−1 σt + α atlt a∗ t l∗ t σt−1 σt σt σt−1 (k∗ t )1−ϑ (a∗ t l∗ t )ϑ , if st = 1 (k∗ t )1−ϑ (a∗ t l∗ t )ϑ , if st = 1    We incorporate this production function into a state-of-the-art frictionless business cycle model. Then, we structurally estimate this model using SMM to recover the properties of σt
  40. 40. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Theorem 1. In a nth-order approximation around steady state: (a) Shocks to the elasticity of substitution, σ, have no impact on f (i.e., on equilibrium allocations) through the partial derivatives of any order n > 0. Hence, σ-shocks are not a source of fluctuations per se. (b) If n > 1 then shocks to σ propagate the effects of other sources of fluctuations on f (i.e., on equilibrium allocations) through the higher-order cross partial derivatives of f between σ and x.
  41. 41. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IDENTIFICATION OF σ
  42. 42. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt MATCHING IRFS FOR IDENTIFICATION: ψa1
  43. 43. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt MATCHING IRFS FOR IDENTIFICATION: ψa2
  44. 44. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE DYNAMIC EFFECTS OF THE ELASTICITY OF SUBSTITUTION, σt
  45. 45. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CYCLICAL BEHAVIOR OF NCES(SR)-CD(LR) BUSINESS CYCLE MODEL AND U.S.1954.I–2012.III U.S. Data NCES(SR)-CD(LR) υx ρ(y, x) ρ(x, x ) υx ρ(y, x) ρ(x, x ) Output: y 3.31 1.00 0.87 3.28 1.00 0.72 Labor Market: eh 3.64 0.88 0.91 3.32 0.91 0.72 e 2.51 0.82 0.93 3.04 0.91 0.72 h 0.28 0.73 0.82 0.03 0.51 0.73 w 0.84 -0.13 0.75 0.63 -0.14 0.75 lp 0.81 0.15 0.73 0.58 0.19 0.70 ls 0.55 -0.34 0.75 0.52 -0.35 0.80
  46. 46. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt OUR CONCLUSIONS ALSO OPEN NEW QUESTIONS 1. The long run: The decline in the U.S. labor share can be entirely explained by the rise in IPP capital income. Open question: Is innovation also behind the rise of individual inequality? Welfare implications of this innovation-inequality tradeoff? 2. The short run: The cyclically of labor share matters for labor market dynamics. Open question: What is behind σt? What are the implications of all this for monetary and fiscal policy?
  47. 47. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Thanks!
  48. 48. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Appendix
  49. 49. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt AGGREGATE EFFECTS OF IPP (a) Investment (b) Price of Invesment (c) Depreciation Rate Back
  50. 50. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt (a) Depreciation Rates of Structures, Equipment and IPP (b) Depreciation Rates of IPP Components Back
  51. 51. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt US LABOR SHARE, BEA 1929-2013 Back
  52. 52. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE IPP CAPITAL SHARE OF INCOME, BEA 1929-2013 Back
  53. 53. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt DECOMPOSITIONS AND ROBUSTNESS 1. IPP depreciation accounts for two thirds of the LS decline. Net IPP income accounts for the remaining one third. Decomposition 2. R&D is the most important IPP component behind the LS decline. Software increasing role since the mid 1970s. Software, R&D and Originals 3. Private IPP is behind the LS decline. Government IPP changes the LS level but not the trend. Private vs. Government 4. The Corporate LS (and ’Asset Basis’ BLS) decline. Corporate LS 5. By industry level. The manufacturing sector is definitely the most affected. By Industry 6. Extentions of IPP capital (e.g., advertising). More IPP Back to Main Findings
  54. 54. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt DECOMPOSITION OF TOTAL EFFECTS • Reformulate IPP capital income as RIPP,tkx IPP,t = 1 + rt vIPP,t−1 − 1 vIPP,t kx IPP,t Net IPP Capital Income + δIPP,t vIPP,t kx IPP,t IPP depreciation • Recompute the aggregate LS without IPP depreciation by setting the second term to zero.
  55. 55. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt DECOMPOSITION OF TOTAL EFFECTS Back
  56. 56. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt SOFTWARE, R&D, AND ARTISTIC ORIGINALS R&D is the most important IPP component behind the early LS decline. Software increasing role since the mid 1970s. Back
  57. 57. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt PRIVATE AND GOVERNMENT IPP Private IPP is behind the LS decline. Government IPP changes the LS level but not the trend. Back
  58. 58. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt INVESTMENT SHARES IN THE CORPORATE SECTOR
  59. 59. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CORPORATE LS AND ’ASSET BASIS’ BLS
  60. 60. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CORPORATE LS AND ’ASSET BASIS’ BLS
  61. 61. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CORPORATE LS AND ’ASSET BASIS’ BLS Back
  62. 62. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt LS AND IPP CAPITAL INTENSITY BY INDUSTRY
  63. 63. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt ... BY SUB-INDUSTRY Back
  64. 64. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt ADDING ADVERTISING TO BEA IPP ACCOUNTS Back
  65. 65. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt More Stuff
  66. 66. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CAPITAL INCOME TO LABOR INCOME RATIO
  67. 67. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CAPITAL TO LABOR RATIO
  68. 68. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt ROBUSTNESS TO SAMPLE PERIOD, AGGREGATE LS
  69. 69. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE TRADITIONAL LS AND THE PRICE OF INVESTMENT
  70. 70. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt THE NET RATE OF RETURN, DIFFERENT VINTAGES
  71. 71. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt PROPRIETORS’ INCOME AND TAXES (% OF OUTPUT)
  72. 72. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt CORPORATE SHARE OF OUTPUT
  73. 73. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt PRE- VS. POST-2013 NATIONAL INCOME DATA (a) Capital Income (b) Labor Income (c) Ambiguous Income
  74. 74. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt LS DECLINE BY INDUSTRY (a) Information (b) Services (c) Manufacturing: Nondurable goods (d) Manufacturing: Durable goods (e) Wholesale Trade (f) Retail Trade
  75. 75. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt IPP CAPITAL AND THE US MODEL Note that our production function is equivalent to: Yt = αk (BtKT,t) σ−1 σ + αh (AtHt) σ−1 σ σ σ−1 With our technology, the interpretaiton of At and Bt are” 1. At represents labor-augmenting technical change. 2. Bt = Ct At represents capital-augmenting technical change. That is, Ct = Bt At represents the differential growth between capital- and labor-augmenting technical change. 3. If Ct = 1 (or KIPP,t = 0), then At is simply Hicks neutral. This is equivalent to the Acemoglu’s (2002, 2003) formulation but we give a specific interpretation to Ct through IPP capital deepening.
  76. 76. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt TWO-STEP ESTIMATION OF THE PRODUCTION FUNCTION In a first step, we estimate ρ as: ln RIPP,tKIPP,t RT,tKT,t = ρ − 1 ρ ln KIPP,t KT,t , The Elasticity of Substitution Between IPP and Traditional Capital Elasticity ρ 5.787∗∗∗
  77. 77. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Then, given the observable series for KIPP,t and KT,t, and the estimated ρ, we can recover Ct as: Ct = KIPP,t KT,t ρ−1 ρ + 1 ρ ρ−1 .
  78. 78. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt Ct AND ρ
  79. 79. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt TWO-STEP ESTIMATION OF THE PRODUCTION FUNCTION In the second step, having recovered Ct, we estimate, σ as: (1) Aggregate model: ln RT,tKT,t + RIPP,tKIPP,t wtHt = ln αk αh + σ − 1 σ ln CtKT,t Ht (2) Traditional model that omits IPP capital from the model (Ct = 1) and from the national income (KIPP,t = 0): ln RT,tKT,t wtHt = ln αk αh + σ − 1 σ ln KT,t Ht Remark: By directly identifying Ct, we circumvent the joint identification impossibility of σ and Ct in Diamond et al. (1978). Back
  80. 80. Labor Share Decline and IPP Capital The Overshooting SVARs and Cyclical Labor Share Labor Market Dynamics and σt STRUCTURAL SHIFT TO LARGER IPP-CAPITAL SHARE CROSS-COUNTRY EVIDENCE (PRELIMINARY WORK WITH D. KOH AND S. AUM) (a) Investment Shares (b) Depreciation Rates (c) IPP Capital Share of Income

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