Inside the Decline of the Labor Share : Technical Change, Market Power, and Structural Change

This paper documents substantial industry level heterogeneity in the decline of the U.S. labor share and its main components: employment, wages, and value added. Moreover, this is also contemporaneous to a strong process of structural change between manufacturing and services during the last two decades. I analyze both phenomena through the lens of a multi-sector model where sector-specific changes in market power and capital biased technical change -- the most prominent explanations for the declining labor share -- also characterize the process of structural change between sectors. The model explains 87% of the decline in the labor share. Increasing market power, which is pervasive across manufacturing and services, accounts for almost two-thirds of the decline. Technical change explains the remaining third and is the fundamental driver of structural change between sectors