The labor share of the national income has fallen steadily since the 1980s in most advanced economies. The most widely accepted explanations of this phenomenon evolve around the substitution between capital and labor. Using firm-level data from Korea, the authors of the paper presented in this seminar divide capital into equipment and software. Their estimated elasticities of substitution show that equipment and labor are complements (0.3), consistent with other micro-level estimates, but software and labor are substitutes (1.6), a novel finding that reconciles the conflicting views on the elasticities in the literature. As the quality of software improves, the labor share falls within firms, especially within those using software more intensively. In addition, production reallocates to the firms that use software more intensively as they become relatively more productive. Because such firms tend to have lower labor shares than others, the reallocation further reduces the aggregate labor share. Software, not equipment capital, is the key to the decline of the labor share.
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