The Global Rise of Asset Prices and the Decline of the Labor Share
62 Pages Posted: 1 Aug 2017 Last revised: 11 Aug 2017
Date Written: July 30, 2017
The labor income share has been decreasing across countries since the early 1980s, sparking a growing literature about the causes of this trend (Elsby et al., 2013; Karabarbounis and Neiman, 2014; Piketty and Zucman, 2014; among many others). At the same time, again since the early 1980s, there has been a global steady increase in equity Tobin’s Q. This paper uses a simple model to connect these two phenomena and evaluates its empirical validation. In our model a raise in equity Tobin’s Q increases equity returns and, importantly, reduces corporate investment. The impact on the capital-output ratio reduces the labor share for standard values of the elasticity of substitution. Based on a common factor model, we find that the increase in Tobin’s Q explains almost 60% of the total decline in the labor income share. We highlight three different factors that operate through the same theoretical channel, namely capital income taxes, monopoly mark-ups and corporate short-termism, and we find empirical evidence for all of them, not only for the rise of monopoly power (which has been the focus of recent literature). We also find that the impact of the relative prices of capital goods on the labor share is not significant. Finally, we use the model to suggest different policies that can revert this declining trend.
Keywords: Tobin's Q, Labor Share, Asset Prices, Capital-Output ratios
JEL Classification: E25, E44, E22
Suggested Citation: Suggested Citation