The payroll share in US states: Evidence from fourteen sectors

This paper does two things. First, it provides evidence on changes in payroll shares across fourteen sectors in US states between 1977 and 2019, and with that offers a missing regional focus to recent empirical research on the US labor share. Second, on the basis of its empirical findings, it engages a descriptive exploration of selected explanations of the decline in the payroll share put forth across a diverse set of analytical camps. Key findings are that, first, while details differ across states and sectors, growth contributions from compensation and productivity tend to dominate, and the former tend to lag the latter in the aggregate. This process is labeled as downward decoupling. Second, the manufacturing sector dominates contributions to the change in state payroll shares in the first period. Third, other progressive sectors (particularly information) dominate the second period. Fourth, labor intensive “stagnant” services buffer the decline of state payroll shares since these sectors’ payroll shares are initially high and throughout both periods expanding. Fifth, relative prices of services are increasing in line with Baumol’s cost disease. Finally, we make the case that any general equilibrium explanation should include the process of structural change in explaining observed dynamics in the aggregate and sectoral factor income shares.