The Decline of the U.S. Labor Share

Abstract

Over the past quarter century, labor's share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession. Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor's share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the laborintensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years. the editors for their many suggestions and comments. We are grateful to Yifan Cao for his excellent research assistance.

Discretionary monetary policy, quantitative easing and the decline in US labor share

“…Relatedly, Harrison (2005), Guscina (2006), and Schneider (2011) argue that globalization may be a root cause of the decline in labor shares. Consistent with these studies, Elsby et al (2013) documents that declines in US labor share are linked to reductions in payroll compensation, a likely cause of which is the off-shoring of the labor intensive part of the US supply chain. 1 Alternatively, Young and Lawson (2014) present evidence that more economically free countries have higher labor shares, all else equal.…”

“…This is true regardless of whether one considers compensation of employees as a share of GDP or gross domestic income (GDI); also regardless of whether or not proprietors' income is excluded from the aggregate income ( Figure 1). Similar declines have been observed throughout OECD countries (OECD, 2012;Elsby et al, 2013). Piketty's (2014) influential book has drawn increased attention to these declines in labor shares.…”

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AbstractSince the turn of the millenium, labor shares of income in the US and other OECD countries have been declining (OECD, 2012;Elsby et al, 2013). Piketty's (2014) influential book has drawn attention to this decline in labor shares and has argued that it may be an inevitability that is inherent in capitalist economies.

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The Labor Share Question in China

“…In addition, Berthold et al (2002) emphasizes the role of globalization on firms' substitution of capital for labor. Oyvat (2010), Schneider (2011), Hutchinson and Persyn (2012), Hogrefe and Kappler (2013) and Elsby et al (2013) confirms the negative effect of globalization with different datasets.…”

“…Maarek (2010) suggests that labor's share in developing countries are lower than that in developed countries because the larger informal sector in developing countries determines workers' outside opportunities in wage setting. Fichtenbaum (2011) In addition to globalization, technology, and labor market institutions, relevant studies have also examined the effects of government expenditure (Harrison, 2002), sectoral structure (Young, 2006;Elsby et al, 2013), privatization (Torrini, 2005), financial crises (Diwan, 2001; Van Arnum and Naples 2013), and economic freedom (Young and Lawson, 2014).…”