The decline of the U.S. labor share of national income

That’s the new paper by Elsby, Jobijn, and Sahin, presented at Brookings earlier in the week.  It’s less pathbreaking than some people are suggesting, but it is absolutely on the mark.  The main finding of significance is that competition from cheap imports is a major source driving wage declines in the United States and shifting income toward owners of capital.  The full abstract is here, with other points of note:

Over the past quarter century, labor’s share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession. Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor’s share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years.

As I reported two weeks ago, Autor, Dorn, and Hanson already found similar results.

There is an entire chapter in Average is Over suggesting that trade effects on U.S. wages, in the negative direction, are stronger than many economists think, through factor price arbitrage, and that the topic deserves further investigation.  But it turns out my discussion did not go far enough in the direction of attributing observed wage changes to trade, and because of this paper, and because of Autor, Dorn, and Hanson, I hereby revise my views accordingly.

Please note of course that this trade is still output-expanding and welfare-improving by traditional criteria, at the global scale.  It simply has within-nation distribution effects which not everyone likes, though global inequality falls.

Arnold Kling, Michael Mandel, and Rob Atkinson, among others, have been ahead of the consensus on this question.


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