Bargaining power, structural change, and the falling U.S. labor share

Michael Cauvel,Aaron Pacitti

doi:10.1016/j.strueco.2022.01.007

Michael Cauvel, Aaron Pacitti

Open Access

https://doi.org/10.1016/j.strueco.2022.01.007

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Abstract

Most explanations for the declining labor share focus on structural changes such as deindustrialization, globalization, financialization, market concentration, and technological change. We argue that these forces operate through a bargaining power channel and that the reduction in the labor share has been driven by lower bargaining power for workers. We first estimate the relationship between bargaining power and labors share of income using a bounds-testing approach and find a significant negative relationship. We then create novel indices of structural change and estimate regressions of the cost of job loss, generally finding that increases in structural change have both increased the cost of job loss and amplified its volatility over the business cycle. Our analysis therefore supports the hypothesis that the decline in the labor share is driven by decreased labor bargaining power and suggests that structural economic changes and weak economic performance in the U.S. have increased inequality.

Highlights

One of the most significant stylized facts in the U.S economy since the 1970s has been the decline in the share of national income accruing to labor
We find that the cost of job loss is a strong determinant of the labor share and that the responsiveness of the cost of job loss to the business cycle increases with the structural change index, suggesting that the responsiveness of the labor share to the business cycle should increase along with structural changes in the U.S economy
We find that structural changes in the U.S economy since 1960—deindustrialization, globalization, financialization, rising market concentration, and technological change—have had a strong effect on workers’ bargaining power, as proxied by the cost of job loss

Summary

Introduction

One of the most significant stylized facts in the U.S economy since the 1970s has been the decline in the share of national income accruing to labor. We explore the causes of the decline in the labor share in the United States. Building on a theme that consistently appears in the literature, we argue that the reduction in workers’ bargaining power has caused the labor share to fall. We empirically measure and analyze the effect of the reduction in workers’ bargaining power using multiple measures of the cost of job loss—the one-year income loss due to unemployment— for the 1960-2016 sample, which is determined data availability. Our baseline cost of job loss measure can be seen, along with an index of the labor share. Our baseline cost of job loss measure can be seen in Figure 1, along with an index of the labor share.

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