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

Abstract

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 67% to 47% 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 over 5 percentage points.

We reconcile these two facts by documenting:

(1) an important reallocation of production towards “hyper-productive plants” and,

(2) a downward adjustment of the labor share of those same plants over time.

These two related forces account for almost all the change in the trend of aggregate labor share in the manufacturing sector, with only a small role for exit of high-labor-share plants. Relative to their peers, 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.

Keywords: labor share, productivity, firm size distribution, organization of markets

JEL Classification: E200, L100, L200, L600, O400