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Modeling IPP Capital and its Effect on the Labor Share

August 29, 2017

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2017. The project is a required component of every master program.


Authors:

Alfredo Andonie, Andrea Greppi, Ece Yagman, Lorenzo Pisati and Moritz Degler

Master’s Program:

Economics

Paper Abstract:

We investigate the effects of intellectual property products capital in the evolution of the labor share for five European countries. Using post-revision national accounts data, we construct a benchmark labor share with the contribution of both, traditional and IPP capital, against which we measure a counterfactual LS which isolates the effects of IPP. We report that the labor share in Austria, France, Germany, and Spain has been consistently declining, with high variation across countries. Our results show that part of this decline is explained by the inclusion and growing importance of IPP capital in the economy. A closer look at France reveals that the main channels through which IPP has an impact on the labor share are a higher depreciation rate and investment flow relative to traditional capital.

Conclusions:

Our analysis of IPP capital and its impact on the LS reveals three main findings. First, we observe a decline in the LS of Austria, France, Germany and Spain, part of which is explained by the impact of IPP capital on aggregate income. Second, a cross-country comparison discloses great variation in both the magnitude at which the LS is falling in these countries and the extent up to which IPP capital can account for such a decline. Finally, a deeper analysis for France, in which we study the dynamics and composition of its aggregate capital, allows us to identify the higher depreciation rate and investment flow of IPP capital as the main channels driving the change in the trend of the LS.

We conclude that, to an extent, the behavior of the LS attests to the transition into more IPP capital-intensive economies. Since the inclusion of intangible capital in the revised European national accounts (ESA 2010), the growing importance of IPP relative to traditional capital has altered essential properties of aggregate capital, such as the depreciation rate. In particular, these changes have translated into new dynamics and ways in which factors are allocated in the economy.

In using revised data, our analysis presents novel evidence for LS dynamics in Europe and its relation with the composition of capital in the economy. From a measurement point of view, it highlights the way in which we have begun to think differently of developments and aggregate indicators. From a theoretical point of view, it compels us to reformulate models that can accommodate these new measurements and their implications for the rest of the economy.

As a final remark, we have not attempted to establish a connection between the LS and inequality. However, the relation between the compensation to labor and the concentration of IPP capital poses interesting challenges for future research. Particularly relevant to this study are the potential ways in which a decline in the LS propelled by an increase in IPP capital maps onto the evolution of inequality.

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