Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline

The aggregate labor share in U.S. manufacturing declined dramatically over the last three decades: Since the mid-1980’s, the compensation for labor declined from 63% to 42% of value added which is unseen in any other sector of the U.S. economy. The labor share of the typical U.S. manufacturing plants, in contrast, rose by 5%. We document that reallocation of production towards "hyper-productive plants" contributes two thirds of the decline while the remaining one third are caused by exit of high-labor share plants. Plants that account for the majority of production by the late 2000's arrive at a low labor share by gradually increasing value added by a factor of three while keeping employment and compensation unchanged. Other than this output response, these low-labor share plants look very similar to their peers along almost all other characteristics such as equipment investment, exposure to trade or whether they are located in right-to-work states. Labor share decline explanations that focus on the role of equipment-embodied technical change, unions or international trade only therefore seem limited. Based on novel empirical evidence, we consider alternative explanations.