The Decline of the US Labor Share Across Sectors

• Published date: 01 September 2021
• Author: Ivan Mendieta‐Muñoz,Codrina Rada,Rudi Arnim
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/roiw.12487

© 2020 International Association for Research in Income and Wealth

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THE DECLINE OF THE US LABOR SHARE ACROSS SECTORS*

by Ivan MendIeta-Muñoz, CodrIna rada and rudI von arnIM

Department of Economics,University of Utah

We provide novel insights on the functional distribution of income in the postwar US economy, based

on a Log Mean Divisia Index decomposition of the labor share by 14 sectors. We identify contribu-

tions from four components: real compensation, labor productivity, employment shares, and relative

prices. The results are presented for the entire period as well as golden age (1948–1979) and neoliberal

era (1979–2017), painting a detailed picture of structural changes. We find that (1) real compensation

and labor productivity dominate; (2) manufacturing plays an important role in the recent decline of

the labor share; (3) employment shifts toward service sectors with higher labor shares have buffered

the decline; and (4) relative prices of services are increasing. We discuss these results in the context of

Baumol’s and Lewis’s seminal contributions. Both theories build on the notion of coexistence of pro-

gressive and stagnant activities, which is documented in our sectoral decomposition.

JEL Codes: C43, D33, O41

Keywords: Baumol, labor share, Lewis, sectoral decomposition, stagnation, structural change

1. IntroduCtIon

This paper presents novel findings on the sources of the decline in the United

States (US) labor share in the postwar period. We provide a systematic analysis of

sectoral contributions to changes in the aggregate labor share using a Log Mean

Divisia Index (LMDI) decomposition of US data from 1948 to 2017. Specifically,

we present statistics on contributions to the aggregate labor share from changes

in sectoral real wage, sectoral labor productivity, the structure of the economy as

measured by employment shares, and the sectoral terms-of-trade or relative prices.

Our paper situates itself within the fast-growing literature on the changing

nature of the distribution of income and the associated rise in income inequality.

Several studies have used decomposition methods to delineate drivers of change of

the aggregate labor share, and have mostly employed regression analysis to identify

its correlates (Elsby etal., 2013; Autor etal., 2017; IMF, 2017; Böckerman and

Note: The authors gratefully acknowledge financial support from the Institute for New Economic

Thinking (INET), and helpful comments from Thomas Ferguson, Ignacio Gonzalez Garcia,

Tom Michl, Robert Pollin, Peter Skott, and Lance Taylor and participants at the 2018 Analytical

Political Economy workshop held at Wesleyan University, conference on “The Great Polarization” in

Salt Lake City, Utah, September 2018, the Amit Bhaduri Festschrift Conference held at the University

of Massachusetts Amherst during March 22–23, 2019, and the Eastern Economic Association

Conference in Boston, February 28, 2020. This paper has also benefited from the comments and sug-

gestions by two anonymous referees of this journal and from the editor D. S. Prasada Rao. The usual

disclaimer applies.

*Correspondence to: Codrina Rada, Department of Economics, University of Utah, Salt Lake

City, UT 84112, USA (rada@economics.utah.edu).

Review of Income and Wealth

Series 67, Number 3, September 2021

DOI: 10.1111/roiw.12487

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Review of Income and Wealth, Series 67, Number 3, September 2021

733

© 2020 International Association for Research in Income and Wealth

Maliranta, 2012; Taylor and Ömer, 2020). These studies have emphasized simple

shift-share effects, or focused on analysis at the firm level.

Our contribution to this literature lies in the focus on sectoral dynamics, and

is, in essence, twofold: first, we provide novel descriptive results on the sources of

the decline in the labor share, and, second, discuss these in the context of Baumol’s

and Lewis’s seminal theoretical contributions on structural change.

Specifically, we provide detailed documentation of the evolution of sectoral pay,

productivity, output and employment over time, and how these trajectories feed into

the changing labor share using a Divisia index-based decomposition. We then delin-

eate the stark differences in aggregate and sectoral labor share changes during the

immediate postwar period, often dubbed a “golden age” of capitalism (1948–1979),

and the subsequent decades, often dubbed the “neoliberal era” (1979–2017).1

Key results of the decompositions can be summarized as follows. First, growth

of real compensation and labor productivity dominate the overall change in the labor

share. Second, the manufacturing sector plays a critical role throughout the entire

postwar period. Initially, strong real compensation gains relative to labor productiv-

ity growth increase the labor share. In the later period, the accelerating collapse of

employment in manufacturing coincides with strong growth of labor productivity

in the sector, which in turn consistently exceeds that of real compensation. Third,

sectors with rising employment shares feature on average lower real compensation

and lower labor productivity growth, and furthermore higher labor shares. These

structural changes thus imply downward pressure on aggregate labor productivity

growth, and at the same time buffer the overall decline of the labor share. Fourth,

relative prices have increased for stagnant service sectors.

Our second contribution is to contextualize decomposition results in light

of Baumol’s and Lewis’s seminal theories on structural change. Recent literature

has emphasized the phenomenon of structural change, particularly in regard to

deindustrialization. van Neuss (2019) presents a comprehensive survey. Similarly,

Kruger (2008) and Herrendorf et al. (2014) highlight old and new theories of

structural change. However, much of this recent literature does not focus on the

interaction between structural change and the functional distribution of income.

Both Baumol and Lewis view the economy as composed of “stagnant” and

“progressive” activities, and put structural change center stage.2 Crucially, a shift

toward service sectors with relatively low labor productivity growth has been

observed, and a slowdown in growth much discussed under the label “secular stag-

nation”. Simultaneously, the labor share has decreased, raising questions about the

underlying mechanisms.

Baumol (1967) assumes homogenous labor in a competitive labor market. The

critical assumptions are (1) that nominal wages across sectors increase in line with

1The term “golden age” was employed by Robinson (1956) in her seminal contribution on growth;

it labels a situation of steady, high growth, and full employment. Similarly, Hobsbawm (1994) labels the

period between 1950 and 1975 a golden age. The term “neoliberalism” is used widely in the public de-

bate to describe a decisive turn toward deregulation, de-unionization, and trade and capital account

liberalization in the wake of conservative electoral victories, particularly in US and UK. For further

discussion, see Marglin and Schor (1992).

2In line with research in this area, we define structural change as pronounced changes in employ-

ment shares in a multi-sector economy—where some progressive sectors experience relatively high labor

productivity growth, and some stagnant sectors experience relatively low or zero labor productivity

growth.