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

Author

Listed:
  • Matthew Smith
  • Danny Yagan
  • Owen Zidar
  • Eric Zwick

Abstract

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.

Suggested Citation

  • Matthew Smith & Danny Yagan & Owen Zidar & Eric Zwick, 2022. "The Rise of Pass-Throughs and the Decline of the Labor Share," American Economic Review: Insights, American Economic Association, vol. 4(3), pages 323-340, September.
    • Handle: RePEc:aea:aerins:v:4:y:2022:i:3:p:323-40
    DOI: 10.1257/aeri.20210268
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General

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