Bargaining power, structural change, and the falling US labor share

Most explanations for the declining labor share focus on structural changes such as deindustrialization, globalization, financialization, market concentration, and technological change. We argue that these forces operate through a bargaining power channel and that the reduction in the labor share has been driven by lower bargaining power for workers. We first estimate the relationship between bargaining power and labors share of income using a bounds-testing approach and find a significant negative relationship. We then create novel indices of structural change and estimate regressions of the cost of job loss, generally finding that increases in structural change have both increased the cost of job loss and amplified its volatility over the business cycle. Our analysis therefore supports the hypothesis that the decline in the labor share is driven by decreased labor bargaining power and suggests that structural economic changes and weak economic performance in the U.S. have increased inequality. (C) 2022 Elsevier B.V. All rights reserved.