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

27 Pages Posted: 12 Jul 2018 Last revised: 11 Oct 2019

See all articles by Luke Petach

Luke Petach

Belmont University

Daniele Tavani

Colorado State University, Fort Collins - Department of Economics

Date Written: October 10, 2019


Four alarming stylized facts have recently emerged in the United States: (i) a decline in the labor share of income; (ii) a decline in labor productivity; (iii) an increase in the top 1% wealth share, and (iv) an increase in the capital-income ratio. In Capital in the XXI Century, Thomas Piketty’s argument is that the r > g inequality determines an increase in the capital-income ratio; if the elasticity of substitution in production is above one, the profit share rises. We provide a contrasting explanation that draws from the Post Keynesian approach to differential saving propensities between classes and the Classical-Marxian theory of induced technical change. In a simple model of ‘capitalists’ and ‘workers,’ we show that institutional changes that lower the labor share—declining unionization, increasing monopsony power in the labor market, the global ‘race to the bottom’ in unit labor costs, or the exhaustion of path-breaking scientific discoveries—can reduce labor productivity growth because of the lessened incentives to innovate to save on labor costs. A falling labor share reduces workers’ total savings, and wealth concentrates in the capitalists’ hands. A higher profit share and wealth share both put pressure on accumulation: but the long-run growth rate, which is anchored to labor productivity growth, has fallen. To restore balanced growth, the capital-income ratio must rise, independent of the elasticity of substitution. These tendencies are not inevitable: taxation can be used to implement any wealth distribution targeted by policymakers; while worker-crushing institutional arrangements can also in principle be reversed through policy. 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 (October 10, 2019). Available at SSRN: or

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)

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