Accounting for Factorless Income—Karabarbounis 2018

Comparing US GDP to measured labor payments and estimated capital rental payments yields a substantial and unpredictable residual or "factorless" income. We investigate three typical strategies for allocating and interpreting factorless income: economic gains (case ), unmeasured capital (case K), and rental rate deviations from standard measurements based on bond returns (case R). We are suspicious this case because it shows a negative link between real interest rates and economic profits, leads to substantial variations in inferred factor-augmenting technologies, and results in profits that have risen since the early 1980s but are still lower than in the 1960s and 1970s. Case K shows how unmeasured capital accounts for all factorless income in recent decades, but its value in the 1960s would have to be more than half the capital stock, which is less conceivable. Case R is the most promising because it leads to more stable factor shares and technology progress than the others, however it requires an explanation for the pattern of rental rate variances. Using a model with different sectors and forms of capital, we show that assessing output, factor shares, and functional inequality depends on factorless income.

Karabarbounis, L., & Neiman, B. (2019). Accounting for factorless income. NBER Macroeconomics Annual, 33, 167–228. https://doi.org/10.1086/700894