# Recent Declines in Labor's Share in Us Income: A Preliminary Neoclassical Account

67 Pages Posted: 29 Jun 2015 Last revised: 31 Jul 2015

See all articles by Robert Z. Lawrence

## Robert Z. Lawrence

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: June 2015

### Abstract

As shown in the 1930s by Hicks and Robinson the elasticity of substitution (sigma) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of sigma is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that sigma is greater than one and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the US has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that σ is less than 1, these declines in the effective capital ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation would raise labor's share in income.

Suggested Citation

Lawrence, Robert Z., Recent Declines in Labor's Share in Us Income: A Preliminary Neoclassical Account (June 2015). NBER Working Paper No. w21296, Available at SSRN: https://ssrn.com/abstract=2624408