Capital Depreciation and Labor Shares Around the World: Measurement and Implications

40 Pages Posted: 22 Oct 2014 Last revised: 22 Apr 2023

See all articles by Loukas Karabarbounis

Loukas Karabarbounis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Brent Neiman

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2014

Abstract

The labor share is typically measured as compensation to labor relative to gross value added ("gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share") may be more important in some settings, however, because depreciation is not consumed. In this paper we make three contributions. First, we document that gross and net labor shares generally declined together in most countries around the world over the past four decades. Second, we use a simple economic environment to show that declines in the price of capital necessarily cause gross and net labor shares to move in the same direction, whereas other shocks such as a decline in the real interest rate may cause the net labor share to rise when the gross labor share falls. Third, we illustrate that whether the gross or the net labor share is a more useful proxy for inequality during an economy's transition depends sensitively on the nature of the underlying shocks that hit the economy.

Suggested Citation

Karabarbounis, Loukas and Neiman, Brent, Capital Depreciation and Labor Shares Around the World: Measurement and Implications (October 2014). NBER Working Paper No. w20606, Available at SSRN: https://ssrn.com/abstract=2513166

Loukas Karabarbounis (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

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Brent Neiman

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/brent.neiman/index.html

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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