Explaining the Decline in the US Labor Share: Taxation and Automation

64 Pages Posted: 8 Jun 2022

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Bernd Süssmuth

University of Leipzig; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2022

Abstract

This study provides evidence for the US that the secular decline in the labor share is not only explained by technical change or globalization, but also by the dynamics of factor taxation, automation capital (robots), and population growth. First, we empirically find indications of co-integration for the period from the last quarter of the 20th to the first decade of the 21st century. Permanent effects on factor shares emanate from relative factor taxation. The latter also have a lasting effect on the use of robots. Variance decompositions reveal that taxing contributes to changes in the two income shares and in automation capital. Second, we analyse and calibrate a neoclassical growth model extended to include factor taxation, automation capital, and capital adjustment costs. Labor and automation capital are perfect substitutes whereas labor and traditional capital are complements. The model replicates the dynamics of the observed functional income distribution in the US during the 1965-2015 period. Counterfactual experiments suggest that the fall in the labor share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.

Keywords: functional income distribution, labor income share, income taxes, automation capital, demography, growth

JEL Classification: D330, E620, O410, J110, J200

Suggested Citation

Heer, Burkhard and Irmen, Andreas and Süssmuth, Bernd, Explaining the Decline in the US Labor Share: Taxation and Automation (2022). CESifo Working Paper No. 9775, Available at SSRN: https://ssrn.com/abstract=4127662 or http://dx.doi.org/10.2139/ssrn.4127662

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Bernd Süssmuth

University of Leipzig ( email )

IEW Institute for Empirical Research in Economics
Grimmaische Str. 12
Leipzig, D-04109
Germany
+49 341 97 33782 (Phone)
+49 341 97 33789 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/iew/professur-oekonometrie/team/prof-dr-bernd-suessmuth.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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