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Demographic Origins of the Decline in Labor's Share

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  • Andrew Glover
  • Jacob Short

Abstract

Since 1980, the earnings share of older workers has risen in the United States, simultaneous with a historic decline in labor's share of income. We hypothesize that an aging workforce has contributed to the decline in labor's share. We formalize this hypothesis in an on-the-job search model, in which employers of older workers may have substantial monopsony power due to the decline in labor market dynamism that accompanies age. This manifests as a rising wedge between a worker's earnings and marginal product over the life-cycle. We estimate the age profile of these wedges using cross-industry responses of labor shares to changes in the age-distribution of earnings. We find that a sixty-year-old worker receives half of her marginal product relative to when she was twenty, which, together with recent demographic trends, can account for 59% of the recent decline in the U.S. labor share. Industrial heterogeneity in this age profile is consistent with the monopsony-power mechanism: highly unionized industries exhibit no relationship between age and payroll shares.

Suggested Citation

  • Andrew Glover & Jacob Short, 2020. "Demographic Origins of the Decline in Labor's Share," BIS Working Papers 874, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:874
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    References listed on IDEAS

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    More about this item

    Keywords

    demographics; labor share; earnings distribution; income distribution;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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