The US labor share of income: what shocks matter?

Ivan Mendieta-Muñoz, Codrina Rada, Márcio Santetti and Rudiger von Arnim

Review of Social Economy, 2022, vol. 80, issue 4, 514-549

Abstract: We propose a novel methodological approach to disentangle the main structural shocks affecting the US labor share of income. We motivate an SVAR model to derive four structural shocks: aggregate demand, labor supply, shocks to wages, and productivity; and quantify the dynamic responses of the labor share to each structural shock. We find substantial differences between the immediate post-war era and the neoliberal period. In order of magnitude, the labor share responded mainly to productivity, aggregate demand, and shocks to wages during the immediate post-war era; whereas shocks to wages, productivity, and to aggregate demand mattered most during the neoliberal era. These effects are statistically significantly different across the two periods only for wage and productivity shocks. Increased (decreased) sensitivity to wage (productivity) shocks during the neoliberal period suggests that the decline in the labor share is mainly driven by the factors that govern wage setting.

Date: 2022
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DOI: 10.1080/00346764.2020.1821907

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