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Declining Labor Shares and the Global Rise of Corporate Savings

51 Pages Posted: 12 Jun 2012 Last revised: 23 Jul 2012

Loukas Karabarbounis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Brent Neiman

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: June 1, 2012

Abstract

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

Suggested Citation

Karabarbounis, Loukas and Neiman, Brent, Declining Labor Shares and the Global Rise of Corporate Savings (June 1, 2012). Chicago Booth Research Paper No. 12-17. Available at SSRN: https://ssrn.com/abstract=2083136 or http://dx.doi.org/10.2139/ssrn.2083136

Loukas Karabarbounis

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brent Neiman (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/brent.neiman/index.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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