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On the Optimal Labor Income Share

Author

Listed:
  • Jakub Growiec

    (SGH Warsaw School of Economics and Narodowy Bank Polski)

  • Peter McAdam

    (European Central Bank)

  • Jakub Mućk

    (SGH Warsaw School of Economics and Narodowy Bank Polski)

Abstract
Labor's income share has attracted interest reflecting its decline. But, from an efficiency standpoint, can we say what share would hold in the social optimum? We address this question using a microfounded endogenous growth model calibrated on U.S. data. In our baseline case the socially optimal labor share is 17 percent (11 percentage points) above the decentralized (historical) equilibrium. This wedge reflects the presence of externalities in R&D in the decentralized equilibrium, whose importance is conditioned by the degree of factor substitutability. We also study the dependence of both long-run growth equilibriums on different model parameterizations and relate our results to Piketty's "Laws of Capitalism."

Suggested Citation

  • Jakub Growiec & Peter McAdam & Jakub Mućk, 2021. "On the Optimal Labor Income Share," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-52, October.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:4:a:8
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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