Sectoral composition of output and the wage share: The role of the service sector

Abstract

This paper looks at structural change as one additional source of decline in the wage share. First, we provide a decomposition of changes in aggregate wage shares into changes due to variations in output composition and in sectoral wage shares for nine OECD countries between 1977 and 2010. We show that the rise in the service sector is a relevant factor in explaining the fall of the wage share, at least for some countries. Next, we develop a two-sector Kaleckian growth model consisting of the service and manufacturing sectors. We assume that structural change is exogenous as it arises from a shift in consumers’ preferences or in the saving rate. When mark-ups are relatively higher in the service sector, we show that: i) a shift in the sectoral composition of demand in favor of the service sector good generates a rise in the profit share; ii) a preferences’ shock in favor of the service sector raises growth if the price of the service good is sufficiently high.