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The decline of the labor share: new empirical evidence

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  • Drago, Bergholt
  • Furlanetto, Francesco
  • Faccioli, Nicolò Maffei

Abstract

We estimate a structural vector autoregressive model in order to quantify four main explanations for the decline of the US labor income share: (i) rising market power of firms, (ii) falling market power of workers, (iii) higher investment-specific technology growth, and (iv) the widespread emergence of automation or robotization in production processes. Identification is achieved with theory robust sign restrictions imposed at medium-run horizons. The restrictions are derived from a stylized macroeconomic model of structural change. Across specifications we find that automation is the main driver of the long-run labor share. Firms’ rising markups can, however, account for a significant part of the accelerating labor share decline observed in the last 20 years. Our results also point to complementarity between labor and capital, thus ruling out capital deepening as a major force behind declining labor shares. If anything, investment-specific technology growth has contributed to higher labor income shares in our sample.

Suggested Citation

  • Drago, Bergholt & Furlanetto, Francesco & Faccioli, Nicolò Maffei, 2019. "The decline of the labor share: new empirical evidence," Working Paper 2019/18, Norges Bank.
    • Handle: RePEc:bno:worpap:2019_18
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    More about this item

    Keywords

    Labor income share; secular trends; technological progress; market power;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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