Technical Progress and Movements in the Labor Share∗

The labor share of national income in the United States has declined since the 1980s and especially after 2000. This paper focuses on the role played by technological change in this process. In particular, firms that adopt new technologies achieve a low labor share, and take a larger market share over time. An example is online retailers such as Amazon, empowered by information technology, that have a lower labor share than traditional retailers, and have continually expanded over the last 20 years. This reallocation process drives down the aggregate labor share. We first document three facts: (i) across sectors, there is a negative correlation between change in concentration and change in the labor share; (ii) large firms usually exhibit a smaller labor share; (iii) in sectors where the labor share declines, the decline is especially strong among large firms. Specifically, gains in labor productivity are not associated with comparable increases in wages. Then we provide a rationale for these facts by assuming that capital and labor are complementary inputs and technological progress is labor saving and embodied in the capital stock. Under these assumptions, our model predicts a negative correlation between firm size and labor share. Further, the adoption of new technologies diminishes the labor shares in large firms and increases their market share. As a consequence, the aggregate labor share declines. This technological channel is consistent with the evolution of labor productivity across sectors during the last 30 years. JEL classification: E23, E25, L11, O33