Economists build models around simple facts to isolate what drives behavior. In macroeconomics, perhaps the most famous of these facts has been the observed stability of the shares of income paid to labor and to capital. At least since Kaldor wrote 60 years ago, this pattern of income distribution has been at the top of the list of regularities to be explained by theories of economic growth.
Well, it turns out that what was stable for much of the 20th century looks as if it is unstable in the 21st. For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.
It is important that we understand why labor's share has declined, and whether that decline will continue. The answer could influence a range of policies, from education and training to taxation and transfers. In what follows, we describe what we know about the evolution of labor's share (including key measurement issues) and highlight several explanations of the observed decline that have recently been proposed.Read More