Labor Share Decline and Intellectual Property Products Capital THE ACCOUNTING U.S. LABOR SHARE (LS),

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  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    Labor Share Decline and Intellectual Property Products Capital

    Dongya Koh 1 Raül Santaeulàlia-Llopis 2 Yu Zheng 3

    1University of Arkansas

    2MOVE-UAB and Barcelona GSE

    3Queen Mary University of London and CEPR

    ESSIM, May 8 2019

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    THE ACCOUNTING U.S. LABOR SHARE (LS), BEA 1947-2017

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    OUR CONTRIBUTION

    (1) The secular decline of the accounting LS is entirely explained by the capitalization of IPP—an accounting change in the treatment of IPP.

    (2) We show that this is the result of two things:

    (i) The rise of IPP investment (an economic change). (ii) An accounting choice on the factor distribution of IPP rents: The

    BEA allocates all these rents to capital (an accounting assumption).

    (3) More reasonable values of χ yield a trendless labor share.

    Our findings have essential implications for the US macro model.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    Motivation

    IPP Capitalization in NIPA

    The Effects of IPP Capitalization on the LS

    Discussion The Factor Distribution of IPP Income, χ Implications for the US Macro Model

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    IPP CAPITAL AND BEA REVISIONS SINCE 1999

    I Before the 1999 BEA revision, IPP items (software, R&D, and artistic originals) were treated as intermediate non-durable consumption in the business sector and final consumption in NPISH and government.

    I Two recent BEA revisions capitalize IPP: • The 1999 revision capitalizes software. • The 2013 revision capitalizes R&D and artistic originals.

    I These revisions capture the increasing role of IPP in the US economy. Corrado, Haltinwanger, and Sichel (2009), McGrattan and Prescott (2010,14), Akcigit, Celik, and Greenwood (2016).

    IPP Investment Share

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED

    USD Bill. Notation 1947 2016

    1. Gross output, pre-revision Q 430.3 27,935.5 2. Plus own-account IPP Io 1.5 544.1 3. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6

    4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.6 5. Less purchased IPP Ip 0.5 188.6 6. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    That is, the revision increases business value added by gross business investment in IPP: Ib = Io + Ip.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED

    USD Bill. Notation 1947 2016

    1. Gross output, pre-revision Q 430.3 27,935.5 2. Plus own-account IPP Io 1.5 544.1 3. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6

    4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.6 5. Less purchased IPP Ip 0.5 188.6 6. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    That is, the revision increases business value added by gross business investment in IPP: Ib = Io + Ip.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED

    USD Bill. Notation 1947 2016

    1. Gross output, pre-revision Q 430.3 27,935.5 2. Plus own-account IPP Io 1.5 544.1 3. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6

    4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.6 5. Less purchased IPP Ip 0.5 188.6 6. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    That is, the revision increases business value added by gross business investment in IPP: Ib = Io + Ip.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED

    USD Bill. Notation 1947 2016

    1. Gross output, pre-revision Q 430.3 27,935.5 2. Plus own-account IPP Io 1.5 544.1 3. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6

    4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.6 5. Less purchased IPP Ip 0.5 188.6 6. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    That is, the revision increases business value added by gross business investment in IPP: Ib = Io + Ip.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED

    USD Bill. Notation 1947 2016

    1. Gross output, pre-revision Q 430.3 27,935.5 2. Plus own-account IPP Io 1.5 544.1 3. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6

    4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.6 5. Less purchased IPP Ip 0.5 188.6 6. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    That is, the revision increases business value added by gross business investment in IPP: Ib = Io + Ip.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    WHAT ABOUT THE INCOME SIDE OF THE ACCOUNTS?

    I The BEA increases business income by the same amount as value added.

    I But the BEA must also decide to which factor of production attribute the income rents generated from IPP investment: VA = W + GOS

    I Let’s denote with χ the proportion of IPP rents attributed to capital, and 1-χ the proportion attributed to labor with χ ∈ [0, 1].

    I The current accounting assumption implemented by the BEA is that χ = 1. That is the BEA allocates the entire IPP investment rents to GOS. Precisely, the BEA boosts profits, proprietors’ income, and depreciation.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    WHAT ABOUT THE INCOME SIDE OF THE ACCOUNTS?

    I The BEA increases business income by the same amount as value added.

    I But the BEA must also decide to which factor of production attribute the income rents generated from IPP investment: VA = W + GOS

    I Let’s denote with χ the proportion of IPP rents attributed to capital, and 1-χ the proportion attributed to labor with χ ∈ [0, 1].

    I The current accounting assumption implemented by the BEA is that χ = 1. That is the BEA allocates the entire IPP investment rents to GOS. Precisely, the BEA boosts profits, proprietors’ income, and depreciation.

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED AND INCOME ACCOUNTS

    USD Bill. Notation 1947 2016

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    10. Compensation of Employees W 110.4 8,082.8

    11. Gross operating surplus (GOS), pre-revision (L. 7−10) Q− (M+Ip)−W 103.9 7,409.2 12. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 13. Equals: GOS, post-revision (L. 9−10) (Q + Io)−M−W 105.9 8,141.9

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED AND INCOME ACCOUNTS

    USD Bill. Notation 1947 2016

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post-revision (L. 3−6) (Q + Io)−M 216.2 16,224.6

    10. Compensation of Employees W 110.4 8,082.8

    11. Gross operating surplus (GOS), pre-revision (L. 7−10) Q− (M+Ip)−W 103.9 7,409.2 12. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 13. Equals: GOS, post-revision (L. 9−10) (Q + Io)−M−W 105.9 8,141.9

  • Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion

    BEA REVISION: BUSINESS VALUE ADDED AND INCOME ACCOUNTS

    USD Bill. Notation 1947 2016

    7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.9 8. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.7 9. Equals: Value added, post

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