Decline In Labor Share Research Articles

Labor share decline across US manufacturing sectors: 1979–2019

ABSTRACT This paper studies the sectoral contributions to aggregate manufacturing labour share decline in the US between 1979 and 2019. Using the Log Mean Divisia index (LMDI) decomposition, the decline in the manufacturing sector’s labour share is decomposed into contributions from real wage growth, labour productivity growth, changes in employment shares, and relative prices arising from the constituent sectors across three business cycles. The primary findings of the paper suggest that the downward decoupling of real wages from labour productivity is the primary contributor to the labour share decline in manufacturing. Moreover, low labour share sectors (especially chemical products, food and beverage and tobacco products, and petroleum and coal products) have experienced an increase in their employment shares, contributing negatively to aggregate manufacturing labour share. This paper advances insights related to sectoral heterogeneity and possible mechanisms behind the decline in aggregate manufacturing labour share.

When temperatures matter: Extreme heat and labor share

While prior literature has demonstrated the negative effects of extreme heat on labor productivity, empirical evidence remains limited on its implications for labor share. This study employs a rich dataset of Chinese manufacturing firms spanning the years 1998 to 2007 to examine the impact of extreme heat on labor share in the context of climate change. Our empirical analysis reveals a statistically significant reduction in labor share triggered by extremely high temperatures. Specifically, an additional day with temperatures above 90 °F leads to a 0.129 percentage-point decrease in labor share. We extend our inquiry to discern the underlying mechanisms and find that the capital-labor substitution channel principally drives the observed decline in labor share. Importantly, our analysis indicates that the manufacturing sector does not provide an employment buffer for workers migrating from the agriculture sector due to temperature-related productivity shocks, thereby exacerbating the detrimental effects on labor share. The findings highlight the policy relevance of enhancing labor market flexibility to mitigate the adverse consequences of extreme heat on labor share.

Explaining the decline of China's labor share: A wide replication of Oberfield and Raval (2021)

SummaryChina's labor share has declined since late 1990s. Using the methodology developed by Oberfield and Raval, this paper estimates China's aggregate capital‐labor elasticity of substitution, leveraging the estimated micro‐level elasticities. The findings indicate that China's aggregate capital‐labor elasticity falls within the range of 0.9 to 1. Utilizing this estimated aggregate elasticity for labor share decomposition, we find that the bias of technical change emerges as the predominant factor driving the decline in labor share.

Tourism-Driven Economies and Income Disparity: Insights From a Regression Discontinuity Design

This paper aims to answer two questions: (1) Does overtourism incline countries to favorise the capital asset holder instead of workers in income distribution? (2) Does income inequality come hand in hand with overtourism? Employing Kaldor's theory of income distribution, this study adapts its theoretical framework to assess countries with a specialization in tourism. The analysis encompasses data from 115 developed countries over the period of 2000 to 2019. A Regression Discontinuity Design (RDD) methodology is utilized for the empirical investigation, categorizing key variables based on the exposure of a country's unit to a tourism-focused developmental strategy. The study reveals that adopting overtourism as a developmental strategy has led to increased inequality, characterized by a rising capital share and a declining labor share over time. Evidence supporting these findings is presented through both parametric and non-parametric Regression Discontinuity Design (RDD) analyses. Robustness checks and placebo tests corroborate these results.

Market power, inequality, and financial instability

Over the last four decades, the U.S. economy has experienced a few secular trends: declining labor share, increasing profit share, widening income and wealth inequalities, rising household sector leverage and associated financial instability, manifested in an increase in the probability of financial crises. This paper provides a unifying framework for explaining these trends based on a rise in firm market power in both product and labor markets. We develop a general equilibrium model and show that the rise in firm market power over the last few decades can generate all of these secular trends.

Perspectives on the Labor Share

As of 2022, the share of US income accruing to labor is at its lowest level since the Great Depression. Updating previous studies with more recent observations, I document the continuing decline of the labor share for the United States, other countries, and various industries. I discuss how changes in technology and product, labor, and capital markets affect the trend of the labor share. I also examine its relationship with other macroeconomic trends, such as rising markups, higher concentration of economic activity, and globalization. I conclude by offering some perspectives on the economic and policy implications of the labor share decline.

The decline in the labor share: Evidence from Japanese manufacturers’ panel data

This paper replicates Kehrig and Vincent (2021) using Japanese data and tests whether the overall labor share decline is led by an increase in low-labor-share firms. The results can be summarized as follows. First, although the labor share of median firms did not rise while the overall labor share was declining, the rate of decline in the labor share of the median firm was slower than the overall rate of decline. Second, the value-added share of firms with a low labor share increased while their salary share did not increase when the overall labor share declined. Third, entry and exit are not important to the decline in overall labor share, as in the United States. Fourth, the role of firms with an extremely low labor share, say under decile, which is a good explanation of the change in labor share in the United States, is limited in Japan. Fifth, the change in actual labor share is very similar to ∑ωi,initialλit, the product of the initial value-added share and labor share at the time. Sixth, firms that increased their value-added share tended to decrease their labor share.

Disentangling Various Explanations for the Declining Labor Share: Evidence from Millions of Firm Records

Disentangling Various Explanations for the Declining Labor Share: Evidence from Millions of Firm Records

What caused the downward trend in Japan’s labor share?

Measuring the labor share is not an easy task. Labor share movements often vary depending on both their definition and the measurement scope. This study estimates the labor share in Japan based on two representative government statistical sources—the National Accounts and the “Financial Statements Statistics of Corporations by Industry” —with their differences in coverage and accounting standards corrected. We confirmed a clear downward trend in Japan’s labor share since the 1990 s, both in the total Japanese economy and in the corporate sector. The driving force behind the labor share decline is the significant decrease in the income of the self-employed (mixed income) and in the salaries and bonuses awarded to executives who are owners of small- and medium-sized enterprises (SMEs). This decrease is attributed to the decline in the number of self-employed individuals and SMEs. By contrast, salaries and bonuses to employees hardly contributed to the decline. These findings suggest that the straightforward narrative that—technological progress, globalization such as the transfer of production overseas, and the expansion of non-regular employment have reduced labor income to employees, thus resulting in a lower labor share—does not directly apply to the Japanese economy. Understanding the mechanism of the decline in Japan’s labor share requires identifying the causes and effects of the decline in the numbers of self-employed individuals and SMEs.

Does air pollution decrease labor share? Evidence from China

Labor share is one of the most significant indicators for income distribution and social inequality. Many studies have documented its decline and provided explanations from various aspects in recent years. This study explores labor share decline through the lens of air pollution, which has been ignored in the literature. With the two-stage least square (2SLS) regression while using thermal inversion as an instrumental variable, we identify air pollution’s impact on firm-level labor share. The results show an increase of 1 μg/m3 PM2.5 concentration leads to a 0.17 percentage point decrease in firms’ labor share. We test two possible channels through which air pollution could influence labor share. The decreases in firms’ labor and production productivity, and average wage are the main channels from the intensive margin. For extensive margin, we mainly focus on the impact on employees, and capital usage and identify its different effects across different technology firms. We find no significant effects on capital usage. Meanwhile, low-tech firms hire more employment to offset production loss due to air pollution, whereas there is no significant effect on employment change in high-tech firms. For heterogeneity, the impact is larger for private firms, firms with lower education-level employees, firms without labor unions, and labor-intensive industries. Our results suggest that raising public awareness of air pollution could have contributed to reducing health damage and social inequality.

Digitalization generates equality? Enterprises’ digital transformation, financing constraints, and labor share in China

A decline in labor share increases income inequality and hinders economic growth. Enterprises are accelerating digital transformation (DT), however, how this affects labor share remains to be determined. We employ the text mining method to obtain panel data on China’s listed companies from 2010 to 2020, and the fixed effects model to investigate the impact of DT on labor share. The empirical results show that DT increases the labor share by easing financial limitations. This conclusion remains valid in a series of robustness tests, such as replacing the calculation methods of core explanatory and predicted variables, and adjusting the time horizon. In addition, the digitalization of state-owned enterprises, labor-intensive enterprises, enterprises with high bargaining power, and enterprises in highly developed digital financial areas, plays a more prominent role in promoting labor share. This study provides new empirical evidence on the income distribution effects of DT.

Can variable elasticity of substitution explain changes in labor shares?

In CES production functions, the magnitude of the elasticity of substitution between capital and labor (σ) is crucial to explain the evolution of the labor share. The decline in labor share observed worldwide can be explained by capital accumulation if σ>1. However, empirical evidence on the value of σ is mixed. To shed light on this issue, we employ a Variable Elasticity of Substitution (VES) production function where σ is an endogenous driver of the labor share. Using macro data for six advanced OECD economies from 1980 to 2020 we provide estimates of σ under imperfect competition. We test the prediction of the model by means of simulations. Mainly, we find that capital deepening, markup and technological change explain a significant part of the observed decline in labor shares. The results suggest complementarity between labor and capital in all the countries except the United States.

The decline of labour share in OECD and non-OECD since the 1980s

ABSTRACT This paper examines the causes of falling labour share in OECD and non-OECD countries since the 1980s by using Karabarbounis and Neiman’s (2014) labour share model. While both groups of countries experience an elasticity of substitution between capital and labour, the factors driving down labour share are different. In OECD countries, export and volatility are key drivers, but in non-OECD countries, the significant factors are financial openness and the capital’s relative price. Overall, technological advancement – as reflected by declining capital’s relative price – coupled with globalization and low economic risk are key factors in explaining a long-term decline of labour share worldwide.

Does Main Street Benefit from What Benefits Wall Street?

AbstractYes. We show that aggregate stock returns predict aggregate U.S. employment, despite the industrial composition of publicly traded firms differing markedly from that of all firms, and the representativeness of public firms declining over time. We also show that appropriately reweighted stock returns predict industry and local labor market outcomes. We find the strongest evidence of an alignment of interests between shareholders and workers in the manufacturing sector, despite its declining labor share of output. Our findings suggest that at quarterly frequencies, product demand shocks are more important drivers of industry- and city-level stock returns than technology shocks.

Government policy and land price dynamics: A quantitative assessment of China’s factor market reforms

This paper examines the role played by government policy regarding factors of production in shaping the dynamics of a growing economy. Using land as an example of an important productive factor, we develop a quantitative model with endogenous land price policy regimes to incorporate the regime switch observed in China from dual-track land pricing to land price discrimination by use. Our model also captures the following three economic reforms in China: introduction of non-SOEs (state-owned enterprises); reform of SOEs characterized by their retreat from the competitive manufacturing sector and the establishment of state monopolies in factor markets around 2000. We calibrate our model to match key economic indicators for China and quantify the effects of these reforms. Our calibrated model is consistent with several stylized facts for China after 2000 such as widening disparity in land prices by use, rapid growth in housing price, land revenue, and government expenditures on public goods, and the steep decline in labor share for income.

Dynamic and non‐neutral productivity effects of foreign ownership: A nonparametric approach

SummaryThis paper studies two novel productivity characteristics of foreign acquisition on high‐tech manufacturing firms: the dynamic and the non‐Hicks‐neutral effects. A dynamic productivity effect of foreign ownership arises when adoption of foreign technology and management practices takes time to fully realize. Furthermore, these dynamic adjustments may be capital or labor augmenting as adoption of advanced production technologies tends to have non‐neutral productivity implications in developed countries. We propose and implement an econometric framework to estimate both effects using firm‐level data from China's manufacturing sector. Our framework extends a nonparametric productivity framework, in which identification is achieved using a firm's first‐order conditions and timing assumptions. We find strong evidence of dynamic and non‐neutral effects from foreign ownership, with significant differences across investment sources. Investment from OECD sources is found to provide a long‐term productivity boost for all but the largest recipients, while that from Hong Kong, Macau, and Taiwan does not raise performance. These findings have implications for China's declining labor share and for the rising domestic value‐added content of its high‐tech exports.

Inside the decline of the labor share: Technical change, market power, and structural change

This paper documents substantial industry-level heterogeneity in the decline of the U.S. labor share and its main components: employment, wages, and value added. The decline is also contemporaneous with a strong process of structural change between manufacturing and services. I analyze both phenomena through the lens of a multi-sector model where sector-specific changes in market power and capital-biased technical change – the most prominent explanations for the declining labor share – also characterize the process of structural change between sectors. I show that increasing market power, which is pervasive across manufacturing and services, accounts for almost two-thirds of the decline in the labor share. Technical change explains the remaining third and is the fundamental driver of structural change between sectors.

Capital-skill complementarity and inequality: Twenty years after

We revisit a seminal capital-skill complementarity analysis of Krusell et al. (2000). We extended their 1963–1992 data set to include the 1992–2017 period. We find that over the recent years, the skill premium pattern changed dramatically, from a U-shaped to a monotonically increasing. However, the capital-skill complementarity framework remains remarkably successful in explaining the data. This is true even when the model is estimated using a significantly declining labor share as in Karabarbounis and Neiman (2014). We finally construct a projection for skill premium for 2017–2037, and we conclude that the inequality will continue to grow in the US economy.

The Rise of Pass-Throughs and the Decline of the Labor Share

We study the coevolution of the fall in the US corporate-sector labor share and the rise of business activity in tax-preferred pass-throughs. We find that reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one-third of the decline in the corporate-sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, magnifying the role of the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares. (JEL D22, E25, H25, K34, L60, L80)

Dynamics of Markups, Concentration, and Product Span

We develop a model with a finite number of multiproduct firms together with a continuum of single-product firms and study the dynamics that arise from product innovation. Consistent with the available evidence, the model predicts rising markups and concentration and a declining labor share. Our dynamics predict the possibility of an inverted-U relationship between labor productivity and product span, for which we provide suggestive evidence. In the optimal allocation, product span and labor productivity are strictly positively related. We also characterize optimal policies for these types of sectors. (JEL D21, D33, D43, J24, O31)