"
I started out in professional life as
So there’s a model — or, actually, a sketch of a model, because I haven’t ground through all the algebra — lurking behind today’s column. That sketch may be found after the jump. Warning: while this will look trivial to anyone who’s been through grad school, it may read like gibberish to anyone else.
OK, imagine an economy in which two factors of production, labor and capital, are combined via a Cobb-Douglas production function to produce a general input that, in turn, can be used to produce a large variety of differentiated products. We let a be the labor share in that production function.
The differentiated products, in turn, enter into utility symmetrically with a constant elasticity of substitution function, a la Dixit-Stiglitz (pdf); however, I assume that there are constant returns, with no set-up cost. Let e be the elasticity of substitution; it’s a familiar result that in that case, and once again assuming that the number of differentiated products is large, e is the elasticity of demand for any individual product.
Now consider two possible market structures. In one, there is perfect competition. In the other, each differentiated product is produced by a single monopolist. It’s possible, but annoying, to consider intermediate cases in which some but not all of the differentiated products are monopolized; I haven’t done the algebra, but it’s obvious that as the fraction of monopolized products rises, the overall result will move away from the first case and toward the second.
So, with perfect competition, labor receives a share a of income, capital a share 1-a, end of story.
If products are monopolized, however, each monopolist will charge a price that is a markup on marginal cost that depends on the elasticity of demand. A bit of crunching, and you’ll find that the labor share falls to a(1-1/e).
But who gains the income diverted from labor? Not capital — not really. Instead, it’s monopoly rents. In fact, the rental rate on capital — the amount someone who is trying to lease the use of capital to one of those monopolists receives — actually falls, by the same proportion as the real wage rate.
In national income accounts, of course, we don’t get to see pure capital rentals; we see profits, which combine capital rents and monopoly rents. So what we would see is rising profits and falling wages. However, the rental rate on capital, and presumably the rate of return on investment, would actually fall.
What you have to imagine, then, is that some factor or combination of factors — a change in the intellectual property regime, the rise of too-big-to-fail financial institutions, a general shift toward winner-take-all markets in which network externalities give first movers a big advantage, etc. — has moved us from something like version I to version II, raising the profit share while actually reducing returns to both capital and labor.
Am I sure that this is the right story? No, of course not. But something is clearly going on, and I don’t think simple capital bias in technology is enough."
brad on larry S
"In Larry's setup, IIRC, there was an (a) low-skilled competitive sector with constant returns to scale and undifferentiated products, and (b) a sector with monopolistic competition and increasing returns to scale, half of which (b1) could employ unskilled labor (finance, marketing, brands, etc.) and in which the owners of the intellectual property reaped the surplus, and half of which (b2) needed to employ skilled, unionized labor, which reaped the surplus. The coming of globalization then eliminated the market power of (b2) and shifted that sector of the economy into (a), leaving us with our more unequal, globalized economy of today…
Although related to Paul Samuelson's 2004 JEP paper: Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization, it was different in that Samuelson just had EME development of the technology to make manufactured exports lower the equilibrium real wage in America, while the idea was to capture not just that but a host of other phenomena as well."
As Paul points out, such a setup holds the possibility of explaining not just (c ) a rise in inequality, (d) an extraordinary growth in the share of firms that have no visible support in production, (e) falling unionization, and (f) falling median wages, but also (g) high average Q but also (h) low marginal Q, hence depressed investment."
As Paul points out, such a setup holds the possibility of explaining not just (c ) a rise in inequality, (d) an extraordinary growth in the share of firms that have no visible support in production, (e) falling unionization, and (f) falling median wages, but also (g) high average Q but also (h) low marginal Q, hence depressed investment."
