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The decline of the U.S. labor share
Citation for published version:
Elsby, M, Hobijn, B & Sahin, A 2014, 'The decline of the U.S. labor share', Brookings Papers on Economic
Activity, vol. 47, no. 2, pp. 1-63. https://doi.org/10.1353/eca.2013.0016
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10.1353/eca.2013.0016
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Brookings Papers on Economic Activity
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© Elsby, M., Hobijn, B., & Sahin, A. (2013). The Decline of the U.S. Labor Share. Brookings Papers on
Economic Activity, 47(2), 1-63. 10.1353/eca.2013.0016
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1
MICHAEL W. L. ELSBY
University of Edinburgh
BART HOBIJN
Federal Reserve Bank of San Francisco
AYS¸EGÜL S¸AHI
.
N
Federal Reserve Bank of New York
The Decline of the U.S. Labor Share
ABSTRACT Over the past quarter century, labor’s share of income in the
United States has trended downward, reaching its lowest level in the postwar
period after the Great Recession. A detailed examination of the magnitude,
determinants, and implications of this decline delivers five conclusions. First,
about a third of the decline in the published labor share appears to be an artifact
of statistical procedures used to impute the labor income of the self-employed
that underlies the headline measure. Second, movements in labor’s share are
not solely a feature of recent U.S. history: The relative stability of the aggregate
labor share prior to the 1980s in fact veiled substantial, though offsetting, move-
ments in labor shares within industries. By contrast, the recent decline has been
dominated by the trade and manufacturing sectors. Third, U.S. data provide
limited support for neoclassical explanations based on the substitution of capital
for (unskilled) labor to exploit technical change embodied in new capital goods.
Fourth, prima facie evidence for institutional explanations based on the decline
in unionization is inconclusive. Finally, our analysis identifies offshoring of
the labor-intensive component of the U.S. supply chain as a leading potential
explanation of the decline in the U.S. labor share over the past 25 years.
E
ver since Kaldor (1957, 1961) documented his growth facts, the con-
stancy of the share of income that flows to labor has been taken to be
one of the quintessential stylized facts of macroeconomics.
1
After several
1. It is important to realize, however, that the proposed stability of the labor share is as
stylized now as it was controversial when Kaldor classified it as a prototypical growth fact.
Kaldor’s claim was met by an extensive literature on measuring the movements in labor’s
share during the first half of the 20th century.
2 Brookings Papers on Economic Activity, Fall 2013
decades of modest variation, prominent measures of labor’s share in the
United States have declined significantly. The headline measure pub-
lished by the Bureau of Labor Statistics (BLS) historically fluctuated
around a mean of close to 64 percent from the immediate postwar period
to the mid-1980s. Thereafter, aside from a brief surge surrounding the
tech bubble at the turn of the 21st century, this measure has displayed a
downward trend, averaging around 58 percent in recent years, 6 percent-
age points below the level that prevailed during the first four decades of
the postwar period.
In this paper, we examine the magnitude, determinants, and implica-
tions of the movements in the U.S. labor share over the past 25 years.
Our paper follows in the footsteps of an extensive literature that has
investigated fluctuations and trends in labor’s share dating back to the
first half of the 20th century.
2
We address three main themes. First, we
identify the sources of income and the underlying industry-level trends
that account for the decline of the U.S. labor share. Second, we consider
possible explanations for the decline. Finally, we reflect on whether the
recent decline warrants a major rethink of the way the labor share is used
by macroeconomists.
Section I documents the measurement of the headline labor share
published by the BLS and the role played in its decline by each of its
constituent income sources. We show that most of the recent downward
trend in the labor share has its origins in reductions in the compensation
of payroll employees as a fraction of gross value added, what we shall
refer to as the “payroll share.” However, the decline in the share of the
remaining source of labor income, that of the self-employed, is shown
to be overstated in the headline measure. This measure is constructed
under the assumption that average wages among the self-employed are
the same as those of payroll employees. We provide evidence suggesting
that this assumption induced the headline measure to imply a negative
capital share among the self-employed during the 1980s, thereby over-
estimating labor’s share and casting doubt on subsequent trends in that
series. Two alternative measures proposed in the early work of Kravis
(1959) have less extreme implications for the returns to capital among
the self-employed. Comparison of these two alternative measures with
the headline series informs our conclusion that around a third of the
decline in the headline measure is a symptom of the method used to
impute self-employment income.
2. For a comprehensive list of this early literature, see Gallaway (1964), footnote 1.
MICHAEL ELSBY, BART HOBIJN, and AYS¸EGÜL S¸AHI
.
N 3
Once the issues surrounding measurement of the labor income of the
self-employed are considered, almost all of the remaining decline in the
labor share is accounted for by the decline in the payroll share. For this
reason, and because the payroll share is comparatively straightforward to
measure and can easily be disaggregated, we focus in the remainder of the
paper on understanding the movements of the payroll share.
In section II we address the sectoral origins of the decline in the pay-
roll share using disaggregated industry-level data. We find that, viewed
from a sectoral perspective, movements in labor’s share are not a feature
solely of recent U.S. history: The relative stability of the aggregate labor
share prior to the 1980s in fact veiled substantial, though offsetting, move-
ments in labor shares within industries. The shift from manufacturing to
services over this period served to depress the aggregate payroll share, as
labor shares in manufacturing exceeded those in services. This effect was
undone, however, by substantial rises in payroll shares within industries,
especially healthcare, prior to the 1980s.
By contrast, these coincidental offsetting effects have not been mirrored
since the late 1980s, the period in which the recent decline in the aggregate
payroll share has emerged. The recent decline has instead been dominated
by within-industry declines in payroll shares, particularly in manufacturing
and trade, as opposed to compositional shifts.
A small group of industries also accounts for the higher-frequency rise
and fall in the labor share in the late 1990s and early 2000s. Consistent
with the timing of the tech bubble that arose then and with the widespread
use of stock options in employee compensation in the tech sector, we find
that around half of the rise and fall in the aggregate payroll share between
1998 and 2003 is accounted for by the changes in payroll shares of a
small set of industries that cover investment banking and the tech sectors,
despite their small share in total value added.
Thus, the results in section II reveal that aggregate movements in the
payroll share owe much to underlying movements in particular indus-
tries. Understanding the evolution of the aggregate payroll share therefore
requires an understanding of changes in payroll shares across sectors. This
insight is confirmed by our analysis in section III.
In that section we show that explanations for the decline in the labor
share that rely solely on an aggregate perspective provide, at best, an
incomplete account of the movements in the labor share. A leading candi-
date among these explanations is the neoclassical notion that declines in
the relative price of investment goods, such as computer equipment, have
induced firms to replace workers with machines. This hypothesis, which
4 Brookings Papers on Economic Activity, Fall 2013
dates back to Hicks (1932), highlights the role of capital-labor substitut-
ability and capital deepening in the determination of income shares, and
it has recently been revived by Karabarbounis and Neiman (2013). Two
corollaries of this account are not supported by U.S. data, however. First,
when the decline in the labor share accelerated in the 2000s it was not
accompanied by an increase in the rate of capital deepening. Second, con-
trary to the predictions of simple versions of the theory, growth in real
wages and output per hour actually slowed down during the 2000s rather
than accelerating. We find similar tensions in other, more elaborate neo-
classical explanations, such as the role played by an increasing skill-share
of the labor force in the presence of capital-skill complementarity.
In section IV, we go beyond an aggregate production function repre-
sentation and investigate the sources of the within-industry changes in
payroll shares by exploiting cross-industry data. Our analysis identifies
a strong correlation between increases in import exposure and declines
in labor share at the industry level. Strikingly, we find that this statistical
relationship could account for 3.3 percentage points of the 3.9 percentage-
point decline in the U.S. payroll share over the past quarter century. We also
revisit the capital-labor substitutability hypothesis by examining whether
the industries that saw the smallest increases in equipment prices were the
ones that experienced the largest declines in payroll shares. Reiterating
our aggregate analysis, we find little support in the cross-industry data for
this explanation. Prima facie evidence for another potential explanation—
the decline in the bargaining power of workers due to deunionization—is
inconclusive: there is a statistically imprecise relation between cross-industry
changes in unionization rates and sectoral declines in payroll shares that
includes both potentially large (and small) effects within conventional con-
fidence intervals.
3
In section V we conclude by considering how these facts and explana-
tions affect the way macroeconomists should think about the labor share.
3. A small but growing literature has focused on understanding trends in the labor share
across countries. In an early example, Blanchard (1997) focuses on the declines in labor
shares in continental Europe during the period 1980 to 1995. Blanchard identifies two poten-
tial explanations: the first is a shift in the distribution of rents from workers to firms; the
second is the adoption of technologies that use less labor and more capital. His empiri-
cal results provide weak support in favor of the second explanation. More recent studies,
such as Bentolila and Saint-Paul (2003), Guscina (2006), Azmat, Manning, and van Reenen
(2011), Harrison (2005), and Jaumotte and Tytell (2007), analyze the role of several factors
in accounting for cross-country movements in labor shares. While there is no consensus on
the drivers of these changes, deregulation, technological progress, globalization, and openness
to trade emerge as potential leading explanations.
