October 2021 issue contents
On the Optimal Labor Income Share

Jakub Growiec^a, Peter McAdam^b, and Jakub Mućk^a

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."

JEL Code: O33, O41.

 
Full article (PDF, 52 pages, 1,187 kb)

^a  SGH Warsaw School of Economics and Narodowy Bank Polski
^b  European Central Bank