Working Paper

Capital-Task Complementarity and the Decline of the U.S. Labor Share of Income

Abstract: This paper provides evidence that shifts in the occupational composition of the U.S. workforce are the most important factor explaining the trend decline in the labor share over the past four decades. Estimates suggest that while there is unitary elasticity between equipment capital and non-routine tasks, equipment capital and routine tasks are highly substitutable. Through the lenses of a general equilibrium model with occupational choice and the estimated production technology, I document that the fall in relative price of equipment capital alone can explain 72 percent of the observed decline in the U.S. labor share. In addition, I find that differences in labor share trends across sectors can be accounted for by varying sensitivities of cost of production to the price of equipment capital.

Keywords: Labor share; Technological change; Capital-task complementarity; Elasticity of substitution; Job polarization; Bayesian estimation;

JEL Classification: C11; E22; E23; E25; J24; J31;

https://doi.org/10.17016/IFDP.2017.1200

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2017-03

Number: 1200

Pages: 73 pages