Jakob Madsen, University of Western Australia

"The Declining Labor Share and The Missing Returns to Capital"

Abstract

The increasing income inequality in the high-income countries over the past four decades has been primarily attributed to the declining gross labor share. However, the net labor share, which is assumed to be a more adequate measure of the functional income distribution, has been flat since WWII; thus, challenging existing theories of declining labor shares, and is inconsistent with evidence of constant or increasing asset returns and increasing top income shares. This research argues that the net income share, conventionally measured, significantly underestimates the decrease in the labor share because it mismeasures capital income through the omission of depreciation allowances, capital gains/losses on capital, wage outlays of governments, interests on domestic government debt, and the marked increase in housing services that is unaccounted for in SNA. Constructing novel data for the labor share for 20 OECD countries over the period 1945-2021, this research shows that the net labor share adjusted for these factors has declined markedly since the end of WWII.

For more information about Jakob Madsen and his interesting work - link to his website.

Contact person: Pablo Selaya