The Decline of the US Labor Share Across Sectors

Abstract

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

Output hysteresis in the US: new evidence from a time-varying Verdoorn's law

“…Hence, sectoral variables in ( 1) and ( 2) should be replaced by their corresponding aggregate versions. It is worth mentioning that diminished importance of manufacturing is associated with a well-documented process of deindustrialization and dualization of the US economystagnant sectors coexisting with dynamic industriesin which manufacturing has lost importance in output and job creation (Mendieta-Muñoz et al, 2019;Taylor and € Omer, 2019). Deindustrialization and dualization undoubtedly have had a profound impact at the macro-level in productivity growth, labor flow and production growth (Taylor and € Omer, 2019).…”

“…These phenomena of deindustrialization and dualization have affected the channel through which the transfer of labor force from low productivity sectors toward manufacturing raises increasing returns in the economy. Due mainly to dualization, this channel has broken down, and now in a sort of reverse-Lewis dynamic, labor flows from manufacturing to low productivity stagnant sectors modifying economy-wide productivity and production; see Mendieta-Muñoz et al (2019). This implies that focusing on manufacturing when studying the evolution of increasing returns leads to disregard of critical structural changes in the United States that manifest outside the manufacturing sector.…”

“…Gordon, 2015;Jones, 2015) must lie in weak demand. On the other hand, a lynchpin of this insufficient aggregate demand is the growing dualism of the US economy in which low pay and low productivity stagnant sectors employ most workers; see Storm (2017), Mendieta-Muñoz et al (2019) and Taylor and € Omer (2019). Cumulative causation involves a circular interaction between aggregate demand, technological progress and increasing returns in such a way that an initial change in a variable of this "triangle" induces changes in the other two, which reinforce the initial change in the former.…”

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“…Will COVID-19 act as a catalyst event heralding a period of decreasing inequality? Will the destructive forces of the pandemic collapse inequality such as was the case in WWII, or will it exacerbate inequalities due to its disproportionate impact on low-income individuals similar to the Great Recession (Mendieta-Muñoz et al 2020;Meyer & Sullivan 2013;Perri & Steinberg 2012;Taylor et al 2015)? Will the policies enacted by governments in respond to the economic fallout produce progressive outcomes such as was the case with the first and second New Deal, or will responses prioritize corporate bailouts and capital interests over workers such as which occurred in the wake of the 2008 financial crisis?…”

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“…Hence the low productivity/(near) zero productivity growth that characterizes so-called 'stagnant' service sector industries (Baumol et al, 1989) means that not only are these industries labour-attracting (employment must grow rapidly as output in these industries grows because of the lack of productivity growth), they are also low wage/(near) zero wage growth industries by virtue of their low productivity/(near) zero productivity growth character. The direct contribution of deindustrialization to the growth of inequality will not be discussed further in what follows, but see, for example, Mendieta-Muñoz et al (2020). 4 The rate of unionization in the private sector of the US economy dropped to just 6% by 2020, union…”