Transatlantic divide in labor shares driven by technology, institutions
A Norges Bank working paper documents a transatlantic divide in labor income share dynamics between Europe and the United States from 1960 to 2023. The study finds labor market institutions drove European declines, while automation primarily impacted the U.S.
Europe's institutions, America's automation
The study reveals a striking divergence in labor income share trends across the Atlantic.
In major euro area economies, the labor share remained stable until the 1980s, then experienced a sharp 10 percent decline between 1980 and 2000, before stabilizing again.
This European pattern primarily reflects changes in labor market institutions and labor supply factors.
In contrast, the U.S. labor share saw a mild, gradual decline from the 1970s, which sharply accelerated after 2000.
This acceleration in the U.S. was predominantly driven by labor-saving technological change, particularly automation forces.
The research highlights that labor market factors initially offset labor-saving forces in Europe but reversed their effect after 1980, becoming the main drivers of the subsequent decline.
Disentangling the underlying forces
The paper employs a structural VAR with common trends to identify persistent labor share dynamics and their drivers, using theory-based sign restrictions.
For Europe, the analysis extends to include unemployment data, distinguishing between wage markup changes (reflecting labor market frictions or bargaining power) and labor supply factors (demographics, participation rates).
It finds that rising worker bargaining power initially increased Europe's labor share (1960-1980), while a subsequent decline was due to higher labor supply and weaker bargaining power.
For the U.S., the study disentangles automation from globalization, using automation-related patent ratios and import shares.
Both automation and globalization contributed to the post-2000 acceleration in the U.S. labor share decline, with automation identified as the dominant force.
A novel lens on an old puzzle
This working paper offers a significant contribution by applying a VAR with common trends to labor share dynamics, a novel use for this framework.
It provides a unified analytical framework to explain the distinct medium-run swings in labor shares and employment per capita across the U.S. and Europe.
The panel structure further enhances the model's utility, especially for European data which is often short at quarterly frequency.