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Drivers of the Labor Share of Income

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Marriott Marquis, Grand Ballroom 2
Hosted By: American Economic Association
  • Chair: Hilde C. Bjørnland, BI Norwegian Business School

A Theory of Falling Growth and Rising Rents

Philippe Aghion
,
London School of Economics
Antonin Bergeaud
,
Bank of France
Timo Boppart
,
Institute for International Economic Studies (IIES)
Peter Klenow
,
Stanford University
Huiyu Li
,
Federal Reserve Bank of San Francisco

Abstract

Growth has fallen in the U.S., while firm concentration and profits
have risen. Meanwhile, labor’s share of national income is down, mostly
due to the rising market share of low labor share firms. We propose a
theory for these trends in which the driving force is falling firm-level costs
of spanning multiple markets, perhaps due to accelerating IT advances. In
response, the most efficient firms (with higher markups) spread into new
markets, thereby generating a temporary burst of growth. Because their
efficiency is difficult to imitate, less efficient firms find markets more
difficult to enter profitably and therefore innovate less. Eventually, due to
greater competition from efficient firms, within-firm markups actually fall.
Despite the increase in the aggregate markup and rents, firm incentives to
innovate decline—lowering the long run growth rate.

Outsourcing, Markups and the Labor Share

Marc Giannoni
,
Federal Reserve Bank of Dallas
Karel Mertens
,
Federal Reserve Bank of Dallas

Abstract

We show that an important reason labor shares are falling in many US industries is the rise in domestic labor outsourcing, which matters little for the aggregate labor share because of offsets in the labor services sector. Using cross-sectional variation in labor shares to study the sources of aggregate labor share losses in the US requires attention to the changing use of intermediate labor services. Labor outsourcing also induces spurious trends in estimates of industry markups based on inverse labor or intermediate input shares. We estimate industry markups in ways that are robust to outsourcing trends, and use them in structural decompositions of the aggregate labor share loss between 1997 and 2016 that account for varying production networks. Rising markups do not contribute meaningfully to aggregate labor share trends before 2009, which are primarily driven by decreases in labor intensity. However, higher markups in a few large US industries are potentially important in depressing the labor share during the recovery from the Great Recession.

Revisiting the Global Decline of the (Non-Housing) Labor Share

Germán Gutiérrez
,
New York University
Sophie Piton
,
Bank of England

Abstract

We show that cross-country comparisons of corporate labor shares are affected by differences in the delineation of corporate sectors. While the US excludes all self-employed and most dwellings from the corporate sector, other countries include large amounts of both -- biasing labor shares downwards. We propose two methods to control for these differences and obtain `harmonized' non-housing labor share series. Contrary to common wisdom, the harmonized series remain stable or increase in all major advanced economies except the US and Canada. These new facts cast doubts on most technological explanations for the decline of the labor share.

The Decline of the Labor Share: New Empirical Evidence

Drago Bergholt
,
Norges Bank
Francesco Furlanetto
,
Norges Bank
Nicolò Maffei Faccioli
,
Autonomous University of Barcelona and Barcelona GSE

Abstract

Labor’s share of national income has fallen in many countries in the last decades. In the US, the labor income share has accelerated its decline since the beginning of the new century, reaching its postwar lowest level in the aftermath of the Great Recession. We estimate a structural vector autoregressive model in order to quantify four of the main explanations for this decline: (i) rising market power of firms, (ii) falling market power of workers, (iii) higher investment specific technology growth, and (iv) the widespread emergence of automation or robotization in production processes. While the strengths and weaknesses of these four explanations have been discussed in depth in the literature, this paper is the first to consider all of them in a unified, empirical framework. Also, while most studies draw inference based on cross-sectional variation in microeconomic data (at the firm or sectoral level), we instead exploit the macroeconomic time series implications of permanent, but aggregate shocks. Identification is achieved with theory robust sign restrictions imposed at medium to long run horizons. The restrictions are derived from a stylized macroeconomic model of structural change. Across specifications we find that automation is the main driver of the labor share decline. Firms’ rising markups can, however, account for a significant part of the accelerating fall observed in the last 20 years. Interestingly, we find little support for stories that imply secular trends in workers’ bargaining power. Finally, we also provide indirect empirical evidence on the degree of substitutability between labor and capital. Our results speak in favor of net complementarity, thus ruling out capital deepening as an explanation of the observed dynamics. If anything, investment specific technology growth has contributed to higher labor income shares in our sample.
Discussant(s)
Benjamin Malin
,
Federal Reserve Bank of Minneapolis
Joseba Martinez
,
London Business School
Aysegul Sahin
,
University of Texas-Austin
Nicholas Trachter
,
Federal Reserve Bank of Richmond
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • O4 - Economic Growth and Aggregate Productivity