DP13333 The Micro-Level Anatomy of the Labor Share Decline

Author(s): Matthias Kehrig, Nicolas Vincent
Publication Date: November 2018
Keyword(s): firm size distribution, Labor Share, productivity, Relative Prices
JEL(s): E2, L1, L2, L6, O4
Programme Areas: Labour Economics, Industrial Organization, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13333

The aggregate labor share in U.S. manufacturing declined from 62 percentage points (ppt) in 1967 to 41 ppt in 2012. The labor share of the typical U.S. manufacturing establishment, in contrast, rose by over 3 ppt during the same period. Using micro-level data, we document a number of striking facts: (1) there has been a dramatic reallocation of value added to "hyper- productive" (HP) low-labor share establishments, with much more limited reallocation of inputs; (2) HP establishments have only temporarily lower labor shares that rebound after five to eight years to the level of their peers; (3) selection into HP status has become increasingly correlated with past size; (4) low labor shares are driven by high revenue total factor productivity (TFPR), not low wages; (5) employment has become less responsive to positive TFPR shocks over time; and (6) HP establishments enjoy a product price premium relative to their peers that causes their high (revenue) productivity, pointing to a significant role for demand-side forces. Counterfactual exercises indicate that selection along size is the primary driver of the fall in the aggregate labor share, with a smaller role for the decline in responsiveness.