Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income

76 Pages Posted: 23 Mar 2017

See all articles by Musa Orak

Musa Orak

Board of Governors of the Federal Reserve System

Date Written: 2017-03

Abstract

This paper provides evidence that shifts in the occupational composition of the U.S. workforce are the most important factor explaining the trend decline in the labor share over the past four decades. Estimates suggest that while there is unitary elasticity between equipment capital and non-routine tasks, equipment capital and routine tasks are highly substitutable. Through the lenses of a general equilibrium model with occupational choice and the estimated production technology, I document that the fall in relative price of equipment capital alone can explain 72 percent of the observed decline in the U.S. labor share. In addition, I find that differences in labor share trends across sectors can be accounted for by varying sensitivities of cost of production to the price of equipment capital.

Keywords: Labor share, Technological change, Capital-task complementarity, Elasticity of substitution, Job polarization, Bayesian estimation

JEL Classification: C11, E22, E23, E25, J24, J31

Suggested Citation

Orak, Musa, Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income (2017-03). FRB International Finance Discussion Paper No. 1200, Available at SSRN: https://ssrn.com/abstract=2939522 or http://dx.doi.org/10.17016/IFDP.2017.1200

Musa Orak (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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