Technological Changes, Offshoring, and the Labor Share

Existing studies on the downward trend in the labor share of income mostly focus on changeswithin individual countries. I document, however, that half of the global decline in the laborshare of income can be traced to the relocation of activities between countries. I develop atwo-country model to show that when the relative price of investment goods falls, productionactivities with a small elasticity of substitution between capital and labor tend to getoffshored from high- to low-wage countries. The model provides an explanation as to whysuch relocation may drive the labor share down in both developed and developingeconomies, as well as globally