Does technological progress lower the labor income share? Evidence from OECD countries

Technological progress (TP) is reshaping factor income distribution, but its long-term effect on the labor income share (LS) in advanced economies remains contested. Using panel data for 37 OECD countries from 1992 to 2022, this study combines two-way fixed effects estimation with instrumental variables and interpretable machine learning to isolate the effect of TP on LS. We find that a 1% increase in patent applications reduces LS by 0.033% in the baseline model. It intensifies notably within economies that suffer from both low trade openness and insufficient human capital. TP intensifies the substitution of capital for labor, increasing the employment of highly skilled labor, thereby depressing LS. The increase in government intervention and bargaining power of workers mitigate the inhibitory effect of TP on LS; however, solely relying on enhancing bargaining power is subject to the limitation of diminishing marginal returns. In the face of the rapid iteration of TP, it is essential to strengthen human capital development to align with cutting-edge technologies and enhance workers' ability to adapt to new technologies. Moreover, implementing differentiated capital taxes and reducing the labor tax burden can help mitigate the crowding-out effect of technology on labor market. Finally, strengthening industry-level collective wage negotiations is encouraged to ensure that productivity growth is more fairly translated into wage growth.