The Global Upward Trend in the Profit Share

29 Pages Posted: 25 Sep 2007

See all articles by Luci Ellis

Luci Ellis

Reserve Bank of Australia; Bank for International Settlements (BIS)

Kathryn Smith

affiliation not provided to SSRN

Date Written: July 2007

Abstract

Profits growth has been strong in many developed economies in recent years, and the profit share - the share of factor income going to capital - has been high compared with historical experience. This paper shows that, rather than being a recent phenomenon, profit shares have trended upwards since about the mid 1980s in most developed economies for which comparable data are available. There are a number of possible explanations for this, but not all of them are consistent with a global trend over two decades, nor do they fit cross-country differences in the trend in the profit share.

The preferred explanation advanced in this paper is that ongoing technological progress has increased the rate of obsolescence of capital goods. This induces a greater rate of churn in both capital and jobs, which puts firms in a stronger bargaining position relative to a labour force that now faces more frequent job losses on average. Firms can therefore reap a larger fraction of the economic surplus created by market frictions, which raises the measured profit share. This effect is stronger where labour market institutions are more rigid, consistent with the cross-country pattern in the trends in the profit share. There is also a positive relationship between the size of the trend in the profit share, and the extent of product market regulation. This suggests a role for competition and innovation in driving down high profit margins. These explanations appear to fit the data better than alternatives raised in the literature.

Keywords: Profit share, technological progress, vintage capital

JEL Classification: E25, L51

Suggested Citation

Ellis, Luci and Smith, Kathryn, The Global Upward Trend in the Profit Share (July 2007). BIS Working Paper No. 231, Available at SSRN: https://ssrn.com/abstract=1013997 or http://dx.doi.org/10.2139/ssrn.1013997

Luci Ellis (Contact Author)

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Kathryn Smith

affiliation not provided to SSRN

No Address Available

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