Reasons for the decline in the labor share appear to be different in the US than in other developed countries, say Cleveland Fed researchers

The labor share — the percentage of economic output that accrues to workers as labor compensation — has declined over the last 20 years in most developed countries. However, the underlying reasons for the decline appear to be different in the United States than in other developed countries according to researchers from the Federal Reserve Bank of Cleveland.

Cleveland Fed economist Roberto Pinheiro and analyst Meifeng Yang investigate two potential explanations for the changes in the labor share across time. The first explanation suggests that changes in the labor share can be partly accounted for by changes in the sectoral composition of the economy and partly by movements in the labor share within sectors. The second explanation suggests that changes in the relative price of inputs, particularly a decrease in the relative price of capital goods, may have induced firms to replace labor with capital, such as machines and software.

Examining data from 1997 to 2015, Pinheiro and Yang say the decline in the labor share in the United States can be explained by both a shift in the sectoral composition of the economy from manufacturing to services and changes in the labor share within those sectors over time. While the shift from manufacturing to services also occurred in other developed countries — and was in fact larger than in the US – the researchers say that shift is unlikely to account for the overall decline in other developed countries' labor share because the labor shares in the other countries' manufacturing and services sectors are more similar than they are in the US.

Pinheiro and Yang note that the labor share within the manufacturing sector has declined in the United States but not in other developed countries. "So while the share of manufacturing jobs has declined less in the United States than in other developed countries, US workers retained less of the output produced in the sector in the form of compensation than did workers in other countries," say the researchers. "In addition, while the labor share in the services sector was mostly flat in the United States in the 1997-2015 period, it increased in other developed economies."

Pinheiro and Yang say that explanations for the decline in the labor share based on a decline in the relative price of capital goods triggering a substitution of capital for labor are broadly consistent with the empirical evidence in both the US and other developed countries. However, they note that the decline in the relative price of capital goods was significantly larger in the US, and the size of the decrease could possibly explain a bigger share of the decline in the US labor share.

The researchers also note that their analysis "does not rule out the effects of other variables, such as deunionization, increases in globalization that induced more international trade and offshoring, and changes in demographics, among others."

Read The Evolution of the Labor Share across Developed Countries.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892