The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....
The Rise of Market Power and the Decline of Labor’s Share
Asher Schechter
2 comments:
Crikey! There must be a lack of competition. From the paper:
'Market power, De Loecker and Eeckhout note, is far from the only force contributing to these trends, and the paper does not attempt to establish any causal link. “We are providing a very simple Econ 101 explanation,” says De Loecker. “If firms’ costs minimize and markups go up, it’s almost a direct implication that their expenditure for labor over sales will go down. If I’m a monopolist, I’m going to reduce quantity, so I need fewer workers, then my prices go up, and my profits go up. It’s almost a direct consequence of the optimal behavior of the firm. Essentially, nominal and real wages will go down, which is something that we see in the data, flows will go down across sectors, and you will see participation going down. Those are the logical implications for market power.”'
Profit and the decline of labor’s nominal share
Comment on Asher Schechter on ‘The Rise of Market Power and the Decline of Labor’s Share’
Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: economists have NO idea what the pivot of their subject matter is.#1
It is pretty obvious that without the true profit theory there is no true distribution theory.#2 In order to arrive at the true profit theory the analysis has to let the false Walrasian microfoundations and the false Keynesian macrofoundations behind and to be based on the correct macrofoundations.#3
For the pure consumption economy then follows:
Qm≡C-Yw, i.e profit Qm is household sector’s spending C minus wages Yw.
Sm≡Yw-C, i.e saving Sm is wage income Yw minus consumption expenditures C.
::::::::::::::::
Qm+Sm=0 or Qm=-Sm
The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior or on markup setting.
• In order that profit comes into existence for the first time in the pure consumption economy the household sector must run a deficit at least in one period. This presupposes the existence of a credit creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• It is a fallacy of composition to trivially generalize what can be observed in an individual firm. Microfounded profit theory is one big fallacy of composition.
The axiomatically correct Profit Law is given for the general case as Qm≡Yd+(I-Sm)+(G-T)+(X-M) and reduces to Qm≡(I-Sm)+(G-T) for Yd, X, M=0; Legend: Qm total monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.
The nominal labor share l is defined as quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, l≡Yw/(Yw+Qm)=1/(1+Qm/Yw).
It is pretty obvious now that market power cannot account for a falling nominal labor share l. The main drivers of increasing overall profit have been in the past decades the increasing debt of the household- and the government sector.
Egmont Kakarot-Handtke
#1 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
#2 See also ‘Essentials of Constructive Heterodoxy: Profit’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110
#3 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start X=O.
Post a Comment