Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown: “There’s been a slowdown in measured productivity growth… since about 2000…

…At the same time, there has been increasing attention given to the fact that labor’s share of GDP has been trending downward over the last 30 years or so…. The flip side of this declining labor share is a less well-documented sense that this is related to greater rents being collected by firms with more market power…. What I want to do here is show how these two trends are related in some fundamental sense through how we measure productivity growth. The TL;DR version is that a falling labor share (and rising profit share of GDP) will necessarily lead to a decline in measured productivity growth, even if underlying innovation doesn’t change. The reason is that if firms have increasing market power, then they are using inputs less efficiently from an aggregate perspective, and measured productivity growth is about how efficiently we use inputs. So increased market power–captured by the decline in labor share–will put a drag on productivity growth…