Endogenous Labor Share Cycles: Theory and Evidence

By Peter McAdam, Jakub Muck and Jakub Growiek


ased on long US time series we document a range of empirical properties of the labor’s share of GDP, including its substantial medium-run swings. We explore the extent to which these empirical regularities can be explained by a calibrated micro-founded long-run economic growth model with normalized CES technology and endogenous labor- and capital-augmenting technical change driven by purposeful directed R&D investments. It is found that dynamic macroeconomic trade-offs created by arrivals of both types of new technologies may lead to prolonged swings in the labor share due to oscillatory convergence to the balanced growth path as well as stable limit cycles via Hopf bifurcations. Both predictions are broadly in line with the empirical evidence.

According to this paper, the current downwards trend in the labor income share is technology driven and unrelated to business fluctuations. This would not have been my first candidate explanation. Rather, I would have first looked at the labor force participation, which is strongly influenced by demographic trends. The labor share and the LFP should roughly the same patterns over time, so there should be something related. The real question, though, is about the causation.


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