The Great K-L Substitution

Loukas Karabarbounis and Brent Neiman have a paper on the decline in labor’s share of income.

We start by documenting the pervasive decline in labor shares around the world at the country, U.S. state, and industry levels. Next, we document a decline in the relative price of investment goods, which we later show to be the key factor explaining the global trend in the labor share.

Recall that Timothy Taylor blogged on this topic (although not on this paper in particular). The story is that computers and computer-driven machines are getting cheaper, leading businesses to substitute capital for labor, causing labor’s share of income to fall.

To me, this, along with factor price equalization, is the most intuitively plausible account for trends in the distribution of income over the past twenty years.

On K-L substitution, TechReview has a new article on Brynjolffson and McAfee, although scanning it I did not see anything new (I liked their e-book and their debate with Tyler Cowen.)

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3 Responses to The Great K-L Substitution

  1. Andrew says:

    I wonder if, in addition to factor price equalization, globalization could also be increasing income inequality in another way. Suppose access to global markets multiplied everyone’s income by the same amount – everyone would be richer, but the spread would be greater. And realistically I imagine that some careers scale better than others. If you can design good software then the cost of expanding into a foreign market might be negligible compared to the returns; less so if you’re a plumber.

  2. Effem says:

    I would think the fall in interest rates would make capital more attractive relative to labor as well as it can be financed cheaply.

  3. R Richard Schweitzer says:

    Surpluses are not being proportionately redeployed.

    If the surpluses, now sequestered as “retained earnings,” etc. were being redeployed “labor” would be required at some degree of increase to give effect to the purposes or intents of redeployment.

    We may see another substitution of created credit (artificial capital) which had, to some extent, mitigated the impact of sequestered surpluses. But it is not in the interests of managerial capitalism to radically rearrange the current state of affairs.

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