The Decline of the U.S. Labor Share Across Sectors

37 Pages Posted: 17 Jan 2020 Last revised: 28 Jan 2020

See all articles by Ivan Mendieta-Muñoz

Ivan Mendieta-Muñoz

University of Utah - College of Social & Behavioral Sciences - Department of Economics

Codrina Rada

University of Utah - College of Social & Behavioral Sciences - Department of Economics

Rudiger von Arnim

University of Utah

Date Written: October 16, 2019

Abstract

This paper provides novel insights on the changing functional distribution of income in the post-war US economy. We present a Divisia index decomposition of the US labor share (1948–2017) by fourteen sectors. The decomposition method furnishes exact contributions from four components towards aggregate changes of the labor share: sectoral real compensation, sectoral labor productivity, the structure of the economy as measured by employment shares, and the structure of markets as measured by relative prices. Results are presented for the entire period as well as the “golden age” (1948–1979) and a “neoliberal era” (1979–2017), painting a rich and detailed picture of structural changes in the US economy. The manufacturing sector plays a dominant role: despite its continuously falling employment share, growth of real compensation matches that of labor productivity in the early period but falls far behind during the neoliberal era. Further, employment shifts towards stagnant sectors with relatively low real wages and productivity. We discuss these results in the context of Baumol’s and Lewis’s seminal contributions on dual economies. While the cost disease is apparent—employment shifts towards stagnant sectors, their relative prices rise, and the aggregate growth rate (of productivity) decreases—the originally suggested mechanism of upward real wage convergence is muted. The observed changes are instead compatible with a “reverse-Lewis” shift, where stagnant sectors act as a labor surplus sink, and dynamic sector labor experiences slowing real wage growth.

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

JEL Classification: D33, C43, O41, O5

Suggested Citation

Mendieta-Muñoz, Ivan and Rada, Codrina and von Arnim, Rudiger, The Decline of the U.S. Labor Share Across Sectors (October 16, 2019). Institute for New Economic Thinking Working Paper Series No. 105, (2019), Available at SSRN: https://ssrn.com/abstract=3520716 or http://dx.doi.org/10.2139/ssrn.3520716

Ivan Mendieta-Muñoz

University of Utah - College of Social & Behavioral Sciences - Department of Economics ( email )

1645 Central Campus Dr.
Salt Lake City, UT 84112
United States

Codrina Rada (Contact Author)

University of Utah - College of Social & Behavioral Sciences - Department of Economics ( email )

1645 Central Campus Dr.
Salt Lake City, UT 84112
United States

Rudiger Von Arnim

University of Utah

1645 E. Campus Center
Salt Lake City, UT 84112
United States

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