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Demographic Origins of the Decline in Labor's Share

Andrew Glover and Jacob Short

No 874, BIS Working Papers from Bank for International Settlements

Abstract: Since 1980, the earnings share of older workers has risen in the United States, simultaneous with a historic decline in labor's share of income. We hypothesize that an aging workforce has contributed to the decline in labor's share. We formalize this hypothesis in an on-the-job search model, in which employers of older workers may have substantial monopsony power due to the decline in labor market dynamism that accompanies age. This manifests as a rising wedge between a worker's earnings and marginal product over the life-cycle. We estimate the age profile of these wedges using cross-industry responses of labor shares to changes in the age-distribution of earnings. We find that a sixty-year-old worker receives half of her marginal product relative to when she was twenty, which, together with recent demographic trends, can account for 59% of the recent decline in the U.S. labor share. Industrial heterogeneity in this age profile is consistent with the monopsony-power mechanism: highly unionized industries exhibit no relationship between age and payroll shares.

Keywords: demographics; labor share; earnings distribution; income distribution (search for similar items in EconPapers)
JEL-codes: E25 J11 J31 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-08
New Economics Papers: this item is included in nep-age, nep-dem, nep-lma and nep-ltv
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