Income Shares, Secular Stagnation, and the Long-Run Distribution of Wealth

23 Pages Posted: 12 Jul 2018 Last revised: 6 Jun 2019

See all articles by Luke Petach

Luke Petach

Belmont University

Daniele Tavani

Colorado State University, Fort Collins - Department of Economics

Date Written: June 4, 2019

Abstract

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

Petach, Luke and Tavani, Daniele, Income Shares, Secular Stagnation, and the Long-Run Distribution of Wealth (June 4, 2019). Available at SSRN: https://ssrn.com/abstract=3198311 or http://dx.doi.org/10.2139/ssrn.3198311

Luke Petach

Belmont University ( email )

1900 Belmont Blvd.
Nashville, TN 37212-3757
United States

Daniele Tavani (Contact Author)

Colorado State University, Fort Collins - Department of Economics ( email )

Fort Collins, CO 80523-1771
United States
9704916657 (Phone)

HOME PAGE: http://https://economics.colostate.edu/author/dtavani/

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