Cognitive Aging and Labor Share

TL;DR

This paper proposes a novel biological explanation for the decline in labor share in industrialized countries, linking aging-related cognitive decline to reduced demand for new outputs and thus lower wages.

Contribution

It introduces a theoretical macroeconomic model connecting aging, cognitive decline, and labor share, validated with historical data across economies.

Findings

Labor share declines with median age in economies.

Model accurately fits historical data.

Cognitive decline impacts demand for new outputs.

Abstract

Labor share, the fraction of economic output accrued as wages, is inexplicably declining in industrialized countries. Whilst numerous prior works attempt to explain the decline via economic factors, our novel approach links the decline to biological factors. Specifically, we propose a theoretical macroeconomic model where labor share reflects a dynamic equilibrium between the workforce automating existing outputs, and consumers demanding new output variants that require human labor. Industrialization leads to an aging population, and while cognitive performance is stable in the working years it drops sharply thereafter. Consequently, the declining cognitive performance of aging consumers reduces the demand for new output variants, leading to a decline in labor share. Our model expresses labor share as an algebraic function of median age, and is validated with surprising accuracy on historical data across industrialized economies via non-linear stochastic regression.