The labour income share and the relative price of investment in the US: an empirical investigation

ABSTRACT

Several studies argue that the recent decline in the secular trend of the labour income share is mostly driven by capital-embodied technological progress which is typically identified with trend reductions in the relative price of investment. In this paper, I use data from the United States to assess the nature of the relationship between trends in the labour share and the relative price of investment. Results from co-integration tests reveal that the share and the relative price of investment are most likely not co-integrated. However, co-variation tests indicate that both time series share a common stochastic component, and additional tests of structural breaks point at the presence of a common change in the mean or trend of both series. These results suggest that capital-embodied or investment-specific technological progress may have played an important role in the decline of the secular trend of the labour share.

KEYWORDS:

• Growth
• investment-specific technological change
• labor share
• time series

JEL CLASSIFICATION:

• C32
• O47
• E25

Acknowledgments

I would like to thank Maggie Jacobson from the Federal Reserve Bank of Cleveland for providing assistance with the construction of the labour income share series. I would also like to thank Luca Benati for sharing the codes to implement the co-variation tests. All the data used in the paper are available upon request. The Gauss codes to implement the structural break tests are taken directly from Perron’s website and are also available upon request along with other computer programs.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ I use the individual structural break date as the starting point of the sample for each series for the unit root test.

² See for example Fisher (2006), Justiniano, Primiceri, and Tambalotti (2011), Schmitt-Grohé and Martin (2011), Benati (2013).

³ I use the shorter period from $1964.I$ to $2009.I$ for the labour share computed using the CP approach due to data limitations. I also perform the same exercise using the BLS headline measure which I take from Elsby, Hobijn, and Ayşegul (2013).

⁴ Results using the BLS headline measure point to the presence of four breaks in the mean or the trend of the series.

⁵ The break dates for the BEA headline series are $1963.II$ with 95 percent CI of $[1961.IV,1963.IV]$; $1975.I$ with CI of $[1974.IV,1975.IV]$; $1983.I$ with CI of $[1982.IV,1983.IV]$; and $1999.IV$ with CI of $[1994.IV,2000.I]$. The BLS series is the only one that yields a break date of $1975.I$: the date proposed by Karabarbounis and Neiman (2014).

⁶ I perform the same exercise and find the same break date of $1982.II$ in the mean of the log difference of the relative price of investment.

⁷ Using the BLS headline measure, the test yields three break dates at $1965.IV$, $1982.IV$ and $1998.I$.

⁸ Elsby, Hobijn, and Ayşegul (2013).

⁹ The test rejects the presence of the co-integration relationship between the relative price of investment and the KR series when I use the common break date of $1981.II$, and the specification of a trend or not.

¹⁰ The series are extracted from Line 1 and 4 of NIPA Table 1.14.

Additional information

Funding

This work was not supported by any funding agency.