The Global Rise of Asset Prices and the Decline of the Labor Share
71 Pages Posted: 1 Aug 2017 Last revised: 16 Jun 2019
Date Written: June 19, 2019
The labor income share has been decreasing across countries since the early 1980s, sparking a growing literature about the causes of this trend (Karabarbounis and Neiman, 2014; Piketty and Zucman, 2014; among many others). At the same time, there has been a steady increase in asset prices. We build a simple model to argue that the increase in the value of financial assets crowds out capital formation. The negative impact of asset prices on the capital-output ratio contributes to decline of the labor share if capital and labor are aggregate complements. Based on a common factor model, we find that this mechanism can account for up to 57\% of the labor share decline. We highlight three potential factors that operate through the same theoretical channel: capital income taxes, capitalized market power rents and corporate governance frictions.
Keywords: Labor Share, Asset Prices, Capital-Output ratios, Tobin's Q.
JEL Classification: E25, E44, E22
Suggested Citation: Suggested Citation