On the Optimal Labor Income Share

37 Pages Posted: 18 Apr 2018

See all articles by Jakub Growiec

Jakub Growiec

National Bank of Poland; Warsaw School of Economics (SGH)

Peter McAdam

European Central Bank (ECB)

Jakub Muck

National Bank of Poland - Department of Economics; Warsaw School of Economics (SGH) - Institute of Econometrics

Date Written: April 10, 2018

Abstract

Labor’s share of income has attracted interest in recent years reflecting its apparent decline. These falls, witnessed across many countries, are usually deemed undesirable. Any such assertion, however, begs the question of what is the socially optimal labor share. We address this question using a micro-founded endogenous growth model calibrated on US data. We find that in our central calibration the socially optimal labor share is 17% (11 pp) above the decentralized equilibrium, calibrated to match the average observed in history. We also study the dependence of both long-run growth equilibria on model parameters and relate our results to Piketty’s “laws of Capitalism”. Finally, we demonstrate that cyclical movements in factor income shares are socially optimal and that the decentralized equilibrium typically does not generate excess volatility.

Keywords: labor income share, endogenous growth, Factor augmenting endogenous technical change, social optimum, decentralized allocation

JEL Classification: O33, O41

Suggested Citation

Growiec, Jakub and McAdam, Peter and Muck, Jakub, On the Optimal Labor Income Share (April 10, 2018). ECB Working Paper No. 2142, ISBN: 978-92-899-3247-9, Available at SSRN: https://ssrn.com/abstract=3161307 or http://dx.doi.org/10.2139/ssrn.3161307

Jakub Growiec (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Peter McAdam

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Jakub Muck

National Bank of Poland - Department of Economics ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) - Institute of Econometrics ( email )

Niepodleglosci 164
Warsaw, 02-554
Poland

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