Causes of decline in labor ’ s share in Japan Apr , 2005

The ratio of total value added attributable to labor, or labor’s share, has been declining in Japan in recent years. (See Exhibit 1.) Kaldor postulated as one of his “stylized facts” that the share was stable overtime in many countries around the world. The ratio, however, has exhibited significant fluctuations in Japan and has been used as an important benchmark that helps account for various macroeconomic activities, as well as firm’s profitability at a microeconomic level. A feeble recovery in consumption spending may well be caused by sustained decline in the labor’s share, while a stronger improvement in corporate profits and private investments may have been a result of increase in capital’s share, which equals unity less labor’s share. Microeconomically, return on total assets (ROA), which measures the operating efficiency of a firm, is of great relevance, since ROA, defined as operating profit divided by fixed assets, can be reexpressed as the product of productivity of capital and capital’s share. Exhibit 1 Labor’s share (defined as personnel cost/ (personnel cost + operating profit + depreciation))