Academic journal article Brookings Papers on Economic Activity

The Decline of the U.S. Labor Share

Academic journal article Brookings Papers on Economic Activity

The Decline of the U.S. Labor Share

Article excerpt

Over the past quarter century, labor's share of income in the United States has trended downward, reaching its lowest level in the postwar period after the Great Recession. A detailed examination of the magnitude, determinants, and implications of this decline delivers five conclusions. First, about a third of the decline in the published labor share appears to be an artifact of statistical procedures used to impute the labor income of the self-employed that underlies the headline measure. Second, movements in labor's share are not solely a feature 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 the 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, prima facie evidence for institutional explanations based on the decline in unionization is inconclusive. Finally, our analysis identifies offshoring of the labor-intensive 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.

**********

Ever since Kaldor (1957, 1961) documented his growth facts, the constancy of the share of income that flows to labor has been taken to be one of the quintessential stylized facts of macroeconomics. (1) After several decades of modest variation, prominent measures of labor's share in the United States have declined significantly. The headline measure published by the Bureau of Labor Statistics (BLS) historically fluctuated around a mean of close to 64 percent from the immediate postwar period to the mid-1980s. Thereafter, aside from a brief surge surrounding the tech bubble at the turn of the 21st century, this measure has displayed a downward trend, averaging around 58 percent in recent years, 6 percentage points below the level that prevailed during the first four decades of the postwar period.

In this paper, we examine the magnitude, determinants, and implications of the movements in the U.S. labor share over the past 25 years. Our paper follows in the footsteps of an extensive literature that has investigated fluctuations and trends in labor's share dating back to the first half of the 20th century. (2) We address three main themes. First, we identify the sources of income and the underlying industry-level trends that account for the decline of the U.S. labor share. Second, we consider possible explanations for the decline. Finally, we reflect on whether the recent decline warrants a major rethink of the way the labor share is used by macroeconomists.

Section I documents the measurement of the headline labor share published by the BLS and the role played in its decline by each of its constituent income sources. We show that most of the recent downward trend in the labor share has its origins in reductions in the compensation of payroll employees as a fraction of gross value added, what we shall refer to as the "payroll share." However, the decline in the share of the remaining source of labor income, that of the self-employed, is shown to be overstated in the headline measure. This measure is constructed under the assumption that average wages among the self-employed are the same as those of payroll employees. We provide evidence suggesting that this assumption induced the headline measure to imply a negative capital share among the self-employed during the 1980s, thereby overestimating labor's share and casting doubt on subsequent trends in that series. Two alternative measures proposed in the early work of Kravis (1959) have less extreme implications for the returns to capital among the self-employed. Comparison of these two alternative measures with the headline series informs our conclusion that around a third of the decline in the headline measure is a symptom of the method used to impute self-employment income. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.