The Decline of the Labor Share: New Empirical Evidence

Abstract

We use time series techniques to estimate the importance of four main explanations for the decline of the US labor income share: rising firm markups, falling bargaining power of workers, higher investment-specific technology growth, and more automated production processes. Identification is achieved with restrictions derived from a stylized model of structural change. Our results point to automation as the main driver of the labor share, although rising markups have played an important role in the last 20 years. We also find evidence of capital-labor complementarity, suggesting that capital deepening may have raised the labor share. (JEL D21, D43, E25, J51, L23, O33, O41)

Labor share, foreign demand and superstar exporters

“…While appealing, this is theoretically hard to reconcile with micro-evidence that the elasticity of substitution between capital and labor is less than unity(Oberfield and Raval, 2014;Moreau, 2019). Other studies highlight the role of a global productivity slowdown (Grossman et al, 2017), privatization(Azmat et al, 2012), automation(Acemoglu and Restrepo, 2018;Bergholt et al, 2019), labor market deregulation(Blanchard and Giavazzi, 2003), plant restructuring (B öckerman and Maliranta, 2011), openness to trade(Guscina, 2006;Harrison, 2005;Jaumotte and Tytell, 2007), global value chains (Reshef and Santoni, 2019), expenditures on intangible capital(Koh et al, 2020), Information and Communication Technology(Lashkari et al, 2019;Aghion et al, 2019), compositional changes driven by the rise of the housing sector (Gutiérrez and Piton, 2020), market concentration(Barkai, 2020), granular market power(Jarosch et al, 2019), common ownership(Azar and Vives, 2018) and rising firms' labor market power and changing production processes(Mertens, 2020) in driving down the labor share.14 My identification strategy also allows me to circumvent the issue of using market concentration measures to proxy for changes in competition(Bresnahan, 1989;Berry et al, 2019; Syverson, 2019).15 Covarrubias et al (2020) argue that markets may have instead become more concentrated due to decreased competition and weakened competition policies, especially in the US(Gutiérrez and Philippon, 2018). My findings are consistent with fiercer competition on international markets.…”

Explaining Deviations from Okun's Law

“…Both shocks are assumed to generate a positive co-movement between output and unemployment. An automation shock captures technological progress that increases output and labor productivity at the expenses of employment, as discussed in Acemoglu and Restrepo (2018) and Bergholt et al (2021) among many others. A labor supply shock captures exogenous variations in participation (driven, for example, by preferences, schooling decisions, demographics, pension reforms or immigration).…”

“…This implies a decrease in employment and an increase in the unemployment rate, while output grows. For an analysis of this type of shock, see Acemoglu and Restrepo (2018) and Bergholt et al (2021).…”

“…The first is an automation shock that increases productivity and output at the expense of human labor, thus moving output and unemployment in the same direction, at least on impact (cf. Acemoglu and Restrepo (2018) and Bergholt et al (2021) among others). The second is a labor supply shock.…”

Explaining the Decline in the US Labor Share: Taxation and Automation

“…Hitherto, attempts to contribute empirically in this direction are in their early infancy. We are only aware of such attempts by Bergholt et al (2019). These authors estimate sign-restricted structural vector autoregressive (SVAR) models with permanent shocks to study "medium-run" trend relationships in this context.…”