Income Shares, Secular Stagnation, and the Long-Run Distribution of Wealth
23 Pages Posted: 12 Jul 2018 Last revised: 6 Jun 2019
Date Written: June 4, 2019
Four alarming stylized facts have recently emerged in the United States: (i) a fall in the labor share of income; (ii) a fall in labor productivity; (iii) an increase in the capital-income ratio, and (iv) an increase in the wealth share owned by top income earners. Drawing from the Pasinetti (1962) approach to differential saving propensities among classes as well as the theory of induced technical change (ITC) by Kennedy (1964), we provide an explanation for these facts that contrasts with the account provided in Piketty (2014). In a simple two-class model with ‘capitalists’ and ‘workers,’ we show that institutional changes that lower the la- bor share—declining unionization, increasing monopsony power in the labor market, the so- called ‘race to the bottom’ in a hyper-competitive global environment, or the exhaustion of path-breaking scientific discoveries as argued by Gordon (2015)—can lower labor productivity growth because of the reduced incentives to innovate to save on labor costs. Combined with ITC, differential saving implies a direct relationship between the capitalist share of wealth and the capital-income ratio independent of the elasticity of substitution in production. These tendencies are not inevitable: taxation can be used to implement the policymakers’ desired wealth distribution; while worker-crushing institutional arrangements can also in principle be reversed through policy. However, neither change appears likely given the current institutional and global policy climate.
Keywords: Capital-Income Ratio, Secular Stagnation, Factor Shares, Wealth Inequality
JEL Classification: D31, E24, E25
Suggested Citation: Suggested Citation