The Fall and Rise of Labor Share During Structural Transformations

We provide new evidence on the long-run relationship between economic growth and labor share in national income, based on a comprehensive panel data set for 144 countries from 1950 to 2017. Our primary finding is that labor share follows a cubic relationship with real GDP per capita over the long process of development. At the beginning of the modern economic growth process, the share of labor in national income first decreases until an initial threshold is reached. After that, labor share keeps increasing until the country's GDP per capita reaches a second threshold, before falling again. We find that these dynamics apply not only to the less developed countries in the postwar years, but also to the advanced countries like the U.K. and the U.S. during their early economic take-offs, which started in the late 18th and 19th century, respectively. Then we propose a two-sector CES-type growth model with structural transformation during which labor reallocates from the old traditional sector to, together with capital gradually getting accumulated in the new modern sector. Calibration and Simulations of the model generate results which are consistent with the nonlinear pattern of movements in labor share