Social conflict, property rights, and the capital–labor split
| Date | 01 October 2020 |
| DOI | 10.1177/0951629820956279 |
| Author | Christodoulos Stefanadis |
| Published date | 01 October 2020 |
| Subject Matter | Articles |
Article
Journal of Theoretical Politics
2020, Vol.32(4) 582–604
ÓThe Author(s) 2020
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DOI: 10.1177/0951629820956279
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Social conflict, property
rights, and the capital–labor
split
Christodoulos Stefanadis
Department of Banking and Financial Management,University of Piraeus, Greece
Abstract
I examine some political economy aspects of the capital–labor split. In a game-theoretic general
equilibrium model, rent-seekers attempt to appropriate the output of manufacturing firms on the
offensive end, while such firms safeguard their income on the defensive end. Then the presence
of imperfect property rights is a breeding ground for social conflict and has two indirect conse-
quences. First, it evens out changes in the gross (before-social-conflict) labor andcapital shares of
total output that are caused by changes in the aggregate factor endowments, leading to more
rigid equilibrium factor shares. Second, if social conflict is more labor-intensive than manufactur-
ing, weaker property rights lead to a larger equilibrium labor share.
Keywords
Capital; factor shares; labor; property rights; rent-seeking; safeguarding
1. Introduction
A well-known observation is that, at least since 1900, the labor and capital shares
of gross domestic product (GDP)—which correspond to the allocation of GDP
between laborers and owners of capital—have tended to remain relatively rigid in
several countries over long periods of time despite substantial changes in the aggre-
gate endowments of capital and labor (e.g., Jones, 2016; Kaldor, 1955; Piketty,
2014; Piketty and Saez, 2014). For example, as Kaldor (1955: 83–84) points out, ‘In
fact no hypothesis as regards the forces determining distributive [labor and capital]
Corresponding author:
Christodoulos Stefanadis,Department of Banking and Financial Management, University of Piraeus, 80 Karaoli
& Dimitriou, Piraeus, 18534, Greece.
Email: cstefana@unipi.gr
shares could be intellectually satisfying unless it succeeds in accounting for the rela-
tive stability of these shares in the advanced capitalist economies over the last 100
years or so, despite the phenomenal changes in the techniques of production .
and in real income per head’. A second important stylized fact is that there appears
to be a gradual decrease in the labor share of GDP around the world in the last sev-
eral decades (e.g., Feenstra et al., 2015; Jones, 2016; Karabarbounis and Neiman,
2014; Piketty, 2014). Overall, factor shares are slow-moving variables in a rapidly
changing world that also exhibit a gradual reallocation of GDP away from labor
(and toward capital) in recent decades.
1
A standard explanation for the relative rigidity of the capital–labor split is that
economic activity may be approximated by Cobb–Douglas production functions,
which have a unit elasticity of substitution between labor and capital (e.g., Cobb
and Douglas, 1928; Jones, 2016; Piketty, 2014). Then the labor and capital shares
of GDP are constant, regardless of the economy’s endowments of capital and labor.
However, empirical research casts doubt on this view; actual production functions
may not be Cobb–Douglas since the elasticity of substitution between capital and
labor may be significantly different from one.
2
Furthermore, such a view of factor-
share rigidity does not account for the gradual decline in the labor share in recent
decades.
Unlike most of the literature that points to economic parameters, such as pro-
duction functions and technology, as the main determinants of the capital–labor
split, some anecdotal evidence brings out the important role of law and politics
(e.g., Piketty, 2014). For example, Krugman (2009) stresses that political conflict
has often been the principal driver of the capital–labor split in the USA in the 20th
and the 21st centuries; labor market regulation and unionization, minimum wage
laws, and the degree of progressivity of the tax system have been of paramount
importance.
3
However, despite the related anecdotal evidence, the political econ-
omy aspects of the capital–labor split are not fully understood in formal economic
or formal political science theory.
In this paper, I present a simple game-theoretic general equilibrium analysis of
some political economy aspects of the capital–labor split. As is standard in a large
part of the general equilibrium literature, the modeling approach places emphasis
on the examination of possible ubiquitous elements, abstracting from local features
tuned to specific case studies. I show that the presence of imperfect property rights
and social conflict may constitute a possible explanation both for the relative rigid-
ity (or the slow-moving nature) of factor shares—i.e., for the relative unresponsive-
ness of factor shares to changes in the aggregate endowments of capital and
labor—and for the recent gradual decline in the labor share. Although, as is well
known (e.g., Acemoglu et al. 2005; North and Thomas, 1973), stronger property
rights tend to be associated with a higher level of GDP per capita, I suggest that
they may also have the indirect (and not necessarily intended) consequence, first,
of decreasing the labor share and, second, of increasing its responsiveness to
changes in aggregate factor endowments.
As in Segal and Whinston (2013), property rights enable the owner of an asset—
or of manufacturing output in the case of our model—to use the benefits of the
Stefanadis 583
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