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The global upward trend in the profit share
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The global upward trend in the profit share

Author

Listed:
  • Luci Ellis
  • Kathryn Smith

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.

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  • Luci Ellis & Kathryn Smith, 2007. "The global upward trend in the profit share," BIS Working Papers 231, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:231
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Profit share; technological progress; vintage capital;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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