" A new paper presented at this year’s Allied Social Science Associations meeting claims that
the apparent stability in the share of income going to labor never happened."
" According to the paper, the decline in the U.S. labor share didn’t start in the 1980s or 2000s—it started right after the Second World War."
"Why has the labor share declined? The rise of intellectual property, it would seem."
" The paper—by Dongya Koh of the University of Arkansas, Raul Santaeulalia-Llopis of the Washington University in St. Louis, and Yu Zheng of the City University of Hong Kong—takes advantage of newly updated GDP data from the U.S. BEA "
"In 2013, the Bureau of Economic Analysis updated its treatment of a variety of issues, including how it treats research and development spending. The BEA previously treated R&D spending as a business expense but, as the BEA realized, it makes more sense to think of spending that could potentially boost a firm’s output as a capital investment."
" As the authors of the paper show, counting investments in intellectual property as, well, investment significantly increases the amount of investment showing up in the data. According to their calculations, intellectual property products have increased from 8 percent of U.S. investment in 1947 to 26 percent in 2013.
Accounting for this kind of capital investment means that the decline in the U.S. labor share starts much earlier than previously thought. According to the paper, the decline starts in 1947, which would mean the labor share was declining throughout the period it was famously stated to be constant. But not only does the decline start earlier than previously thought—it’s also much larger. It’s actually twice as large. And the increase in intellectual property products explains the entirety of the decline.
Furthermore, the paper’s authors also looked into the elasticity of substitution between capital and labor, a key parameter for understanding the decline of the labor share. The three economists calculate an elasticity greater than one, meaning capital (including intellectual property products) is a substitute for labor. Several other studies that look at the question at a more macro level have also found an elasticity greater than one, while micro-level studies tend to find elasticities below one.