Declining Labor Shares and the Global Rise of Corporate Savings
51 Pages Posted: 12 Jun 2012 Last revised: 23 Jul 2012
Date Written: June 1, 2012
We document a 5 percentage point decline in the share of global corporate income paid to labor from the mid-1970s to the late 2000s. Increased dividend payments did not absorb all of the resulting increase in profits, and therefore, the supply of corporate savings increased by over 20 percentage points as a share of total global savings. These trends were stronger in countries experiencing greater declines in the relative price of investment goods. We develop a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and the sectoral composition of savings affects macroeconomic allocations. We calibrate the shape of the production function and the capital market imperfections to match the cross-sectional variation in the two trends. In response to the observed global decline in investment prices, our model generates more than half of the observed changes in labor shares and corporate savings. The non-unitary elasticity of substitution between capital and labor interacts with imperfections in the capital market to jointly shape the economy's dynamics.
Keywords: Labor Share, Production Function, Corporate Savings, Capital Market Imperfections
JEL Classification: E21, E22, E25, G32, G35
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