A Dynamic Theory of the Declining Aggregated Labor Income Share: Intangible Capital vs. Tangible Capital

Reports of the literature documenting the declining labor share of income have increased greatly in the past few years, which is opposed to one of the famous Kaldor (1961) “stylized facts” of growth. The declining labor income share has been observed since the 1980s in a number of countries, and especially in the United States. Recent studies have revealed the following five major driving forces of the declining labor share: (i) supercycles and boom-busts, (ii) rising and faster depreciation, (iii) superstar effects and consolidation, (iv) capital substitution and automation, and (v) globalization and labor bargaining power. We set up a two-sector optimal growth model with the R&D intermediate sectors. By integrating driving factors (ii) through (iv) above into the model, we demonstrate the long-term decline of the aggregated labor income share.