Research

This paper argues that a unified analysis of consumption and production is required to understand the long-run behavior of the U.S. labor share. First, using household data on the universe of consumer spending, I document that higher-income households spend relatively more on labor-intensive goods and services as a share of their total consumption. Interpreted as non-homothetic preferences, this fact implies that economic growth increases the labor share through an income effect. Second, using disaggregated data on factor shares and capital intensities, I document that equipment-intensive goods experienced relatively larger declines in their labor shares. Based on this finding, I estimate that capital and labor are gross substitutes, and that investment-specific technical change reduces the labor share. Given the estimated elasticities, a parsimonious neoclassical model quantitatively matches the observed low-frequency movements in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter. 

We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of their wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporations to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted access to external funds and thus a socially inefficient down- sizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.

This paper employs a benchmark heterogeneous-agent macroeconomic model to examine a number of plausible drivers of the rise in wealth inequality in the U.S. over the last forty years. We find that the significant drop in tax progressivity starting in the late 1970s is the most important driver of the increase in wealth inequality since then. The sharp observed increases in earnings inequality and the falling labor share over the recent decades fall far short of accounting for the data. The model can also account for the dynamics of wealth inequality over the period—in particular the observed U-shape—and here the observed variations in asset returns are key. Returns on assets matter because portfolios of households differ systematically both across and within wealth groups, a feature in our model that also helps us to match, quantitatively, a key long-run feature of wealth and earnings distributions: the former is much more highly concentrated than the latter. 

This paper analyzes the ability of a job ladder framework to explain recent evidence on life-cycle earnings dynamics. Using administrative data, Guvenen, Karahan, Ozkan, and Song (2015) document several new facts about the distribution of earnings growth, most notably large negative skewness and high excess kurtosis, rejecting the frequently used log-normal framework. I show that these new facts can be well explained by a standard structural representation of a frictional labor market – a  life-cycle version of the job ladder model – in combination with a simple human capital process. Furthermore, I identify endogenous search effort, risk aversion and wealth accumulation, and skill loss in unemployment as key model features that interact with the labor market friction to jointly reconcile the evidence.

We use 1993-2015 Norwegian administrative panel data on wealth and income to study lifecycle wealth dynamics. By employing a novel budget constraint approach, we show that at age 50 the excess wealth of the top 0.1%, relative to mid-wealth households, is accounted for by higher saving rates (38%), inheritances (34%), returns (23%), and labor income (5%). One-fourth of the wealthiest---the "New Money"---start with negative wealth but experience rapid wealth growth early in life. Relative to the "Old Money," the New Money are characterized by even higher saving rates, returns, and labor income. We use these dynamic facts to test six commonly used models of wealth inequality. Although these models can generate the high concentration of wealth seen in the cross-section, they tend to put too much weight on (accidental) bequests and fail to capture the contribution of the New Money. A model with heterogeneous returns that decrease in wealth, and non-homothetic preferences is consistent with the new facts on the dynamics of wealth accumulation. 

The US labor share has declined, especially in manufacturing and retail. Yet, the labor share of a typical median firm in these sectors has risen. This paper introduces a model where firms incur fixed costs to automate tasks. In response to lower capital prices, the model reproduces the labor share patterns observed in the data: large firms automate more tasks, reducing the aggregate labor share; while the median firm continues to operate a labor-intensive technology with a rising labor share. When calibrating the automation fixed costs to match the observed adoption heterogeneity, the model generates the aggregate and new firm-level facts quantitatively as the result of lower capital prices, especially in manufacturing from 1982--2012.