Inside the decline of the labor share: Technical change, market power, and structural change

Abstract

This paper documents substantial industry-level heterogeneity in the decline of the U.S. labor share and its main components: employment, wages, and value added. The decline is also contemporaneous with a strong process of structural change between manufacturing and services. I analyze both phenomena through the lens of a multi-sector model where sector-specific changes in market power and capital-biased technical change – the most prominent explanations for the declining labor share – also characterize the process of structural change between sectors. I show that increasing market power, which is pervasive across manufacturing and services, accounts for almost two-thirds of the decline in the labor share. Technical change explains the remaining third and is the fundamental driver of structural change between sectors.

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