Technology vs globalisation as cause of the declining labour share Hat tips to Noah Smith and James Hamilton for highlighting two papers on the possible causes behind the declining share of income that has flowed to labour in recent decades, and especially since the turn of the century: Chart via Hamilton. The papers offer competing views. One assigns the heaviest blame to offshoring, the other to greater efficiencies in the economic sectors that make investment goods, which encouraged firms to substitute these cheaper capital goods for labour. The latter is consistent with the "robots" story. Making the case for offshoring is Elsby, Hobijn, and Şahin: First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor's share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years. And favouring technology is Karabarbounis and Neiman: The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. Do note that the latter paper focusses on the global trend rather than just what happened in the US. If the first paper is right and the bulk of the issue is offshoring, then everyone can breathe a little easier, as Noah writes. The US can't again send a big chunk of its supply-chain jobs to China, where productivity-adjusted wages are gaining on those of the US. All that's left is to wait for the currency adjustment and trade rebalancing to run its course, or perhaps just nudge things along by pursuing an inflationary, weak-dollar policy. Not that robots can't eventually become the problem, but the US can deal with that later when it's a reality. This line of thinking might also suggest that the main reason for the persistently negative equilibrium rate a la "secular stagnation" thinking is also the simplest: the global savings glut and coinciding investment dearth. Well, obviously I can't be sure, but I still think that factors related to both technology and globalisation are involved, at least in the US. The first paper, which favours the offshoring explanation, gives two reasons for doubting the technology story in the second paper: First, the acceleration of the decline in the labor share in the 2000s was not accompanied by an increase in the rate of capital deepening. Second, contrary to the predictions of the theory, growth in real wages and output per hour in fact slowed down during the 2000s rather than accelerated. The second reason flows naturally from the first: a slowdown in capital deepening can eventually lead to a slowdown in output per hour. The issue is why capital deepening slowed in the first place given the ostensibly increasing efficiency gains for capital, and what that slowdown represents. I'm still trying to wrap my mind around this, but I think there's a possible explanation that doesn't actually negate the technology story. It is found in an earlier study by John Fernald, which I covered previously here in point 3. The idea is that much of the investment needed to get the new technologies percolating throughout the broader economy had already been made by the time of the dot-com bubble bursting in 2000. But it took a while after the investments had been made for these new technologies to become general purpose technologies, i.e. for their influence to spread beyond just the newly prominent tech sector that emerged in the 1990s. Eventually their influence did spread, and this is why productivity growth remained vigorous several years into the 2000s even though capital deepening slowed dramatically when the bubble burst. But that doesn't mean that these technologies hadn't already changed the equation of the capital-labour substitution, maybe permanently. It just took a while for the relevant measurements to capture the changes. The ramifications of businesses reorganizing themselves - and of their having made the corresponding intangible investments - to adopt these technologies were actually understated by measured productivity growth in the period before 2000. Those ramifications persisted long after the bubble burst despite the slowdown in capital deepening, and continue to persist. The theory goes something like this: 1) The labour vs capital equation changes in favour of capital in the late 1990s, 2) Capital deepening slows in response to the dotcom bubble bursting and subsequent recession, 3) Offshoring plays its part, and indeed it's hard to see how it wouldn't have played a role, 4) A lacklustre jobs recovery, partly but not comprehensively explained by the preceding three items, follows the 2000-2001 downturn -> All of which means that the weak growth in wages and productivity throughout the decade shouldn't be too surprising in hindsight. Maybe this isn't right either. The point here isn't to make the case that this is what happened - or to excuse policy failures, or to dismiss any of the competing stagnationist theories - but rather to argue that it's wrong to rule anything out yet. The interaction of these influences remains difficult to untangle.