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Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
Labor Share Decline andIntellectual Property Products Capital
Dongya Koh 1 Raul Santaeulalia-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 thecapitalization 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
DiscussionThe Factor Distribution of IPP Income, χImplications 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 sectorand 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 27,935.52. Plus own-account IPP Io 1.5 544.13. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6
4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.65. Less purchased IPP Ip 0.5 188.66. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0
7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 27,935.52. Plus own-account IPP Io 1.5 544.13. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6
4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.65. Less purchased IPP Ip 0.5 188.66. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0
7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 27,935.52. Plus own-account IPP Io 1.5 544.13. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6
4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.65. Less purchased IPP Ip 0.5 188.66. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0
7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 27,935.52. Plus own-account IPP Io 1.5 544.13. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6
4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.65. Less purchased IPP Ip 0.5 188.66. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0
7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 27,935.52. Plus own-account IPP Io 1.5 544.13. Equals: Gross output, post-revision: Q + Io 431.8 28,479.6
4. Intermediate expenditure, pre-revision M + Ip 216.0 12,443.65. Less purchased IPP Ip 0.5 188.66. Equals: Intermediate expenditure, post-revision M 215.5 12,255.0
7. Value added, pre-revision (L. 1−4): Q− (M + Ip) 214.2 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 theincome rents generated from IPP investment: VA = W + GOS
I Let’s denote with χ the proportion of IPP rents attributed to capital, and 1-χthe 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 BEAboosts 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 theincome rents generated from IPP investment: VA = W + GOS
I Let’s denote with χ the proportion of IPP rents attributed to capital, and 1-χthe 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 BEAboosts 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 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 7,409.212. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.713. 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 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 7,409.212. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.713. 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 15,491.98. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.79. 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 7,409.212. Plus own-account and purchased IPP (Ib) Io + Ip 2.0 732.713. 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: PRIVATE AND GOVERNMENT PRODUCT ACCOUNTSUSD Bill.
Notation 1947 2016
Private sector:
1. Personal consumption expenditure, pre-revision C 161.9 12,824.72. Less: NPISH net investment in IPP Inp −DInp -0.1 4.03. Equals: Personal consumption expenditure, post-revision C− (Inp −DInp) 162.0 12,820.7
4. Gross private investment, pre-revision X 35.1 2,301.05. Plus: Gross private investment in IPP Ib + Inp 2.0 756.26. Equals: Gross private investment, post-revision X + Ib + Inp 37.1 3,057.2
Government sector:
7. Government expenditure, pre-revision G 39.0 3,081.08. Plus: Government depreciation in IPP DIg 1.0 186.89. Equals: Government expenditure, post-revision G + DIg 40.0 3,267.8
Gross domestic product, GDP:
10. GDP, pre-revision (L. 1+4+7) C + X + G 246.8 17,685.511. Plus: Business investment in IPP Ib 2.0 732.712. Plus: NPISH depreciation in IPP DInp 0.1 19.513. Plus: Government depreciation in IPP DIg 1.0 186.814. Equals: GDP, post-revision (L. 3+6+9) C + (X + Ib + DInp) + (G + DIg) 249.9 18,624.5
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
BEA REVISION: PRIVATE AND GOVERNMENT PRODUCT ACCOUNTSUSD Bill.
Notation 1947 2016
Private sector:
1. Personal consumption expenditure, pre-revision C 161.9 12,824.72. Less: NPISH net investment in IPP Inp −DInp -0.1 4.03. Equals: Personal consumption expenditure, post-revision C− (Inp −DInp) 162.0 12,820.7
4. Gross private investment, pre-revision X 35.1 2,301.05. Plus: Gross private investment in IPP Ib + Inp 2.0 756.26. Equals: Gross private investment, post-revision X + Ib + Inp 37.1 3,057.2
Government sector:
7. Government expenditure, pre-revision G 39.0 3,081.08. Plus: Government depreciation in IPP DIg 1.0 186.89. Equals: Government expenditure, post-revision G + DIg 40.0 3,267.8
Gross domestic product, GDP:
10. GDP, pre-revision (L. 1+4+7) C + X + G 246.8 17,685.511. Plus: Business investment in IPP Ib 2.0 732.712. Plus: NPISH depreciation in IPP DInp 0.1 19.513. Plus: Government depreciation in IPP DIg 1.0 186.814. Equals: GDP, post-revision (L. 3+6+9) C + (X + Ib + DInp) + (G + DIg) 249.9 18,624.5
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
BEA REVISION: PRIVATE AND GOVERNMENT PRODUCT ACCOUNTSUSD Bill.
Notation 1947 2016
Private sector:
1. Personal consumption expenditure, pre-revision C 161.9 12,824.72. Less: NPISH net investment in IPP Inp −DInp -0.1 4.03. Equals: Personal consumption expenditure, post-revision C− (Inp −DInp) 162.0 12,820.7
4. Gross private investment, pre-revision X 35.1 2,301.05. Plus: Gross private investment in IPP Ib + Inp 2.0 756.26. Equals: Gross private investment, post-revision X + Ib + Inp 37.1 3,057.2
Government sector:
7. Government expenditure, pre-revision G 39.0 3,081.08. Plus: Government depreciation in IPP DIg 1.0 186.89. Equals: Government expenditure, post-revision G + DIg 40.0 3,267.8
Gross domestic product, GDP:
10. GDP, pre-revision (L. 1+4+7) C + X + G 246.8 17,685.511. Plus: Business investment in IPP Ib 2.0 732.712. Plus: NPISH depreciation in IPP DInp 0.1 19.513. Plus: Government depreciation in IPP DIg 1.0 186.814. Equals: GDP, post-revision (L. 3+6+9) C + (X + Ib + DInp) + (G + DIg) 249.9 18,624.5
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
BEA REVISION: PRIVATE AND GOVERNMENT PRODUCT ACCOUNTSUSD Bill.
Notation 1947 2016
Private sector:
1. Personal consumption expenditure, pre-revision C 161.9 12,824.72. Less: NPISH net investment in IPP Inp −DInp -0.1 4.03. Equals: Personal consumption expenditure, post-revision C− (Inp −DInp) 162.0 12,820.7
4. Gross private investment, pre-revision X 35.1 2,301.05. Plus: Gross private investment in IPP Ib + Inp 2.0 756.26. Equals: Gross private investment, post-revision X + Ib + Inp 37.1 3,057.2
Government sector:
7. Government expenditure, pre-revision G 39.0 3,081.08. Plus: Government depreciation in IPP DIg 1.0 186.89. Equals: Government expenditure, post-revision G + DIg 40.0 3,267.8
Gross domestic product, GDP:
10. GDP, pre-revision (L. 1+4+7) C + X + G 246.8 17,685.511. Plus: Business investment in IPP Ib 2.0 732.712. Plus: NPISH depreciation in IPP DInp 0.1 19.513. Plus: Government depreciation in IPP DIg 1.0 186.814. Equals: GDP, post-revision (L. 3+6+9) C + (X + Ib + DInp) + (G + DIg) 249.9 18,624.5
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
BEA REVISION: PRIVATE AND GOVERNMENT PRODUCT ACCOUNTSUSD Bill.
Notation 1947 2016
Private sector:
1. Personal consumption expenditure, pre-revision C 161.9 12,824.72. Less: NPISH net investment in IPP Inp −DInp -0.1 4.03. Equals: Personal consumption expenditure, post-revision C− (Inp −DInp) 162.0 12,820.7
4. Gross private investment, pre-revision X 35.1 2,301.05. Plus: Gross private investment in IPP Ib + Inp 2.0 756.26. Equals: Gross private investment, post-revision X + Ib + Inp 37.1 3,057.2
Government sector:
7. Government expenditure, pre-revision G 39.0 3,081.08. Plus: Government depreciation in IPP DIg 1.0 186.89. Equals: Government expenditure, post-revision G + DIg 40.0 3,267.8
Gross domestic product, GDP:
10. GDP, pre-revision (L. 1+4+7) C + X + G 246.8 17,685.511. Plus: Business investment in IPP Ib 2.0 732.712. Plus: NPISH depreciation in IPP DInp 0.1 19.513. Plus: Government depreciation in IPP DIg 1.0 186.814. Equals: GDP, post-revision (L. 3+6+9) C + (X + Ib + DInp) + (G + DIg) 249.9 18,624.5
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
QUALITATIVE IMPLICATIONS FOR THE LS
I LS is defined as 1 minus capital share:
LS =
(1− GOS
Y
).
I Then, the difference between the post-revision LS and the pre-revision LS is:
LSPost − LSPre =
(1 − GOSPost
YPost
)−
(1 − GOSPre
YPre
)= − (YPost − GOSPost)∆
(YPost − ∆)YPost< 0
where ∆ = GOSPost − GOSPre = YPost − YPre = Ib + DIg + DInp .
I This opens the question on whether IPP capitalization can explain the declineof the accounting LS.
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
DiscussionThe Factor Distribution of IPP Income, χImplications for the US Macro Model
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
THE CONSTRUCTION OF THE ACCOUNTING LABOR SHARE (LS)
We apply a standard definition of nation-wide labor share using national incomedata (BEA): (e.g., Cooley and Prescott 1995, Krueger 1999, Gomme and Rupert 2007)
I Unambiguous Capital Income (UCI) = Rental Income + Corporate Profits +Net Interest + Current Surplus Government Enterprises + Taxes onProduction - Subsidies - (Sales & Excise Taxes) + Business Current TransfersPayments + Statistical Discrepancy
I Unambiguous Labor Income (ULI) = Compensation of Employees
I Unambiguous Income (UI) = UCI + DEP + ULI
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
THE CONSTRUCTION OF THE ACCOUNTING LABOR SHARE (LS)
I Ambiguous Income (AI) = Proprietors’ Income + Sales & Excise Taxes
I Ambiguous Capital Income (ACI) = UCI+DEPUI × AI.
I Then gross operating surplus (or capital income) is:
Gross Operating Surplus (GOS) = UCI + DEP + ACI
I Our benchmark accounting LS is:
Labor Share = 1− Capital Share = 1− GOSY
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
A COUNTERFACTUAL ACCOUNTING LS
I To show the effects of IPP on accounting LS, we construct a counterfactual LSunder pre-1999 accounting rules.
I Pre-1999 Accounting LS
LSPre-1999 = 1−GOS− (Ib + DInp + DIg)
Y− (Ib + DInp + DIg)
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
THE EFFECTS OF IPP CAPITALIZATION ON THE LS, US 1947-2017
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
THE EFFECTS OF IPP CAPITALIZATION ON THE LS, US 1947-2017
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
THE EFFECTS OF IPP CAPITALIZATION ON THE LS, US 1947-2017
US Corporate LS US Vintage LS US LS 1929-2016
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
GROSS LS VS. NET LS
I Does depreciation lie behind the decline of the LS? (e.g. Bridgman, 2014).
(a) Pre-1999 Accounting (b) Post-2013 Accounting
NO, it is the result of IPP capitalization.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
GROSS LS VS. NET LS
I Does depreciation lie behind the decline of the LS? (e.g. Bridgman, 2014).
(a) Pre-1999 Accounting (b) Post-2013 Accounting
NO, it is the result of IPP capitalization.
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
DiscussionThe Factor Distribution of IPP Income, χImplications for the US Macro Model
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
DISCUSSION
I Had the BEA kept IPP as expense, the accounting LS would be trendless. Butwe do NOT want to go back to the pre-1999 accounting rules. So then, what?
I If χ =1 (as the BEA assumes), then an immediate interpretation of our resultis an economic one: The rise in IPP capital generates the decline of theaccounting LS.
I What is a reasonable value for χ?
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
DISCUSSION
I Had the BEA kept IPP as expense, the accounting LS would be trendless. Butwe do NOT want to go back to the pre-1999 accounting rules. So then, what?
I If χ =1 (as the BEA assumes), then an immediate interpretation of our resultis an economic one: The rise in IPP capital generates the decline of theaccounting LS.
I What is a reasonable value for χ?
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
DISCUSSION
I Had the BEA kept IPP as expense, the accounting LS would be trendless. Butwe do NOT want to go back to the pre-1999 accounting rules. So then, what?
I If χ =1 (as the BEA assumes), then an immediate interpretation of our resultis an economic one: The rise in IPP capital generates the decline of theaccounting LS.
I What is a reasonable value for χ?
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
AN EXAMPLE CASE FOR χ =1
I Consider an economy where R&D employees work for firms that fully belongto capital owners. The compensation package of R&D workers includes a basesalary plus bonuses (WR&D). This is consistent with the effective BEAcompensation.
I The R&D workers develop a new R&D product for the firm’s own use. Fromthe perspective of the BEA accounting rules:• This new R&D product is own-account investment, IR&D.• Firm’s income increases by IR&D, since firm’s profits will be boosted by
the same amount.• Because the firm is entirely owned by capital owners, the boost in profits
entirely goes to capital income.
I The BEA assumption χ =1 is consistent with this example.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
AN EXAMPLE CASE FOR 0 < χ <1
I Assume now the firm partly belongs to capital owners and partly to workers. Thecompensation package of the R&D worker includes a base salary and bonuses(WR&D), plus equity compensation in the form of long-term incentives(LTIR&D). This is NOT consistent with the BEA compensation.
I Because the firms now is partly owned by capitalists and partly owned byworkers, the boost in profits must partly go to capital income and partly go tolabor income. That is 0 < χ < 1 in this example.
I This example is aligned with the notion of sweat equity (McGrattan andPrescott, 2010) and also recent lit. on corporate finance: Research employeespartially own the cash flows from intangible capital (Lustig, Syverson and vanNiermergurgh, 2011, Eisfeldt and Papanikolaou, 2014, Sun and Zhang, 2018).
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ
I Ideally, we would like to know who owns the new R&D product.
I Define the R&D worker compensation as the sum of wages, bonuses andlong-term incentives:
R&D Worker Compensation = WR&D + LTIR&D
• WR&D is the BEA compensation of employees (includes wages and bonuses).• LTIR&D is not in national accounts.
I Then, the factor distribution of rents from IPP investment that goes to capitalowners (versus workers) is,
χ = 1− LTIR&D
IR&D
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ FROM MICRO DATA
(1) Split the boost in profits IIPP according to the R&D cost structure from theNSF data. We obtain χ = 0.38.
(2) Use data on the compensation package for a pool of corporate R&D headsover the 1990s (Lerner and Wulf, 2007). Source: Confidential compensationsurvey from Hewitt Associates We obtain χ = 0.59.
(3) The median direct compensation package for R&D officers in BioPharmaindustry. Company’s most recent DEF 14A (Proxy) statement, filed with theU.S Securities and Exchange Commission (SEC) between 8/1/2012 and7/31/2013. Source: Clarivate Analytics We obtain χ = 0.58.
(4) Taking into account other (unobservable) intangibles χ = 0.5 (McGrattan andPrescott, 2010)
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ FROM MICRO DATA
Back-of-the-envelope calculation
CEIPP =IIPP
YCE
=939
18, 624.5× 8, 082.8 = 407.5 bn
LTIIPP = CEIPP = 407.5 bn
χ = 1− LTIIPP
IIPP= 1− 407.5
939= 56.6%.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ FROM MICRO DATA
Back-of-the-envelope calculation
CEIPP =IIPP
YCE
=939
18, 624.5× 8, 082.8 = 407.5 bn
LTIIPP = CEIPP = 407.5 bn
χ = 1− LTIIPP
IIPP= 1− 407.5
939= 56.6%.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ FROM MICRO DATA
Back-of-the-envelope calculation
CEIPP =IIPP
YCE
=939
18, 624.5× 8, 082.8 = 407.5 bn
LTIIPP = CEIPP = 407.5 bn
χ = 1− LTIIPP
IIPP= 1− 407.5
939= 56.6%.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
MEASURING χ FROM MICRO DATA
Back-of-the-envelope calculation
CEIPP =IIPP
YCE
=939
18, 624.5× 8, 082.8 = 407.5 bn
LTIIPP = CEIPP = 407.5 bn
χ = 1− LTIIPP
IIPP= 1− 407.5
939= 56.6%.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
EFFECTS OF χ ON THE LABOR SHARE
I More empirically relevant measures of χ imply that the structural-shifttowards a more IPP-intensive economy does not change the factordistribution of income.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
EFFECTS OF χ ON THE LABOR SHARE
I More empirically relevant measures of χ imply that the structural-shifttowards a more IPP-intensive economy does not change the factordistribution of income.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
IMPLICATIONS FOR THE US MACRO MODEL
I A growing literature considers the decline of the accounting LS is aneconomic phenomenon at face value.
I By contrast, we argue: theory is not warranted unless it is logically consistentwith the measurement that generates the decline, χ.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
IMPLICATIONS FOR THE US MACRO MODEL
I A growing literature considers the decline of the accounting LS is aneconomic phenomenon at face value.
I By contrast, we argue: theory is not warranted unless it is logically consistentwith the measurement that generates the decline, χ.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
IMPLICATIONS FOR THE US MACRO MODEL
(a) χ = 1, BEA (b) χ = 0.38, R&D Cost Structure
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
A MODEL FOR THE STRUCTURAL SHIFT TOWARDS IPP INVESTMENT
We propose a theory consistent with the facts that we uncovered. We specify anaggregate production function that displays IPP capital deepening (with respect tonon-IPP capital):
Yt = At
αk
((K
ρ−1ρ
IPP,t + Kρ−1ρ
T,t
) ρρ−1)σ−1
σ
+ αhHσ−1σ
t
σ
σ−1
. (1)
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
A MODEL FOR THE STRUCTURAL SHIFT TOWARDS IPP INVESTMENT
We can conveniently rewrite it as
Yt = At
(αk(CtKT,t
)σ−1σ + αhH
σ−1σ
t
) σσ−1
, (2)
where
Ct =
((KIPP,t
KT,t
) ρ−1ρ
+ 1
) ρρ−1
, (3)
explicitly depends on IPP capital; and note that for a given ρ we can directlyidentify Ct from data on IPP and traditional capital.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
A MODEL FOR THE STRUCTURAL SHIFT TOWARDS IPP INVESTMENT
We can further rewrite our production function as
Yt =
(αk(BtKT,t
)σ−1σ + αh (AtHt)
σ−1σ
) σσ−1
, (4)
which is the familiar shape of the aggregate production function posed inAcemoglu (2002, 2003) where At is labor-augmenting technical change and Bt istraditional capital-augmenting technical change.
Distinctively, in our case, the traditional capital-augmenting technical change,Bt = CtAt, is determined by the IPP capital deepening (with respect to traditionalcapital).
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
A MODEL FOR THE STRUCTURAL SHIFT TOWARDS IPP INVESTMENT
Table: The Elasticity of Substitution Between Aggregate Capital and Labor, US 1947-2016
BEA LS Empirical χ Pre-1999 Revision LSχ=1 χ=0.58 χ=0.5 χ=0.38 –
Elasticity σ: 1.040∗∗∗ 1.012 1.009 1.003 1.004
Notes: The estimates are for the entire sample years 1947-2016. We denote significance level at 10 percent with(*), 5 percent with (**) and 1 percent with (***). We report significance with respect to a value of one, that is, weexplore whether the aggregate production function is significantly different from Cobb-Douglas.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
CONCLUSION
Main findings:I Secular decline of LS is entirely explained by the capitalization of IPP.I LS decline is the result of the rise in IPP investment (economic change) plus
an accounting assumptions on the distribution of IPP rents: χ = 1.I More reasonable values of χ (e..g, based on micro data) yield an absolutely
trendless LS.
Implications for the US Macro Model:I The lack of attention to measurement can severely misguide economic theory.I Research effort should be devoted to accurately measuring the factor
distribution of IPP rents (χ) across all intangible assets. We need new dataand new theory.
Motivation IPP Capitalization in NIPA The Effects of IPP Capitalization on the LS Discussion
CONCLUSION
Main findings:I Secular decline of LS is entirely explained by the capitalization of IPP.I LS decline is the result of the rise in IPP investment (economic change) plus
an accounting assumptions on the distribution of IPP rents: χ = 1.I More reasonable values of χ (e..g, based on micro data) yield an absolutely
trendless LS.
Implications for the US Macro Model:I The lack of attention to measurement can severely misguide economic theory.I Research effort should be devoted to accurately measuring the factor
distribution of IPP rents (χ) across all intangible assets. We need new dataand new theory.
Appendix
INVESTMENT SHARES OF AGGREGATE INVESTMENT BY CAPITAL TYPES
(a) Tangibles and IPP Shares of AggregateInvestment
(b) IPP Components Shares of AggregateInvestment
Back
INVESTMENT SHARES OF OUTPUT BY CAPITAL TYPES
(a) Tangibles and IPP Shares of Output (b) IPP Components Shares of Output
Back
INVESTMENT SHARES IN THE CORPORATE SECTOR
CORPORATE LS AND ’ASSET BASIS’ BLS LS
Back
COUNTERFACTUAL LS WITH VINTAGE LS
(a) Pre-2013 Accounting LS with Vintage LS (b) Pre-1999 Accounting LS with Vintage LS
Back
US LABOR SHARE, BEA 1929-2016
Back
SOFTWARE VS. R&D DECOMPOSITION
Before the 1980s the capitalization of R&D explains the decline. After the 1980s thecapitalization of software does. Back
PRE-1999 ACCOUNTING LS AND THE PRICE OF INVESTMENT
The decline of the price of investment coexists with pre-1999 accounting LS(Greenwood, Hercowitz, and Krusell, 1997).