Trends in the Labour Share

Tony OConnor
09383581
oconnot3@tcd.ie
November 28, 2014

Abstract
The objective of this paper is to investigate the change in the labour share of
income, or total value added, in common production functions. This paper finds
that the labour share, measured through the marginal productivity of production
labour, began to decline in the 1970s. This is contrary to the literature which date
the beginning of the decline to the 80s. A possible reconciliation here is that it took
time for the wage to adjust downwards to the marginal productivity of manual labour.
In contast, the marginal productivity of non-production labour has remained stable.
These findings seem to go against the hypothesis that technology and automation
was responsible for the decline, though not much new support can be found for the
idea that trade was responsible.

Introduction

Te objective of this paper is to analyse the shifts in the labour share of income,
measured as value added, using standard production functions.

Traditionally, the stability of the labour share has been regarded as a stylized
fact [Kaldor, 1961]. However, recent literature has indicated that the share of labour
in value added has been declining in the large majority of countries [Karabarbounis
and Neiman, 2013]. This paper will examine this question a panel of 473 industries,
over the years 1958-2009, to determine whether this occured at an industry level in
the U.S.
This paper will proceed as follows. First, we will examine the literature to date
detailing the trend in the labour share, and the factors that may be detrminging
its path. Second, the economic model and empirical approach of this paper will be
outlined. Third, a description of the data will be provided. Fourth, the estimations
results will be described and evaluated. Lastly, we will conclude.

Literature Review

Feenstra and Hanson [1999] note that not only did the wages of low-skilled workers
fell relative the the wages of high-skilled workers during the 1980 and the 1990s, but
the wages of the low-skilled fell in real terms. Using a modification of the conventioanl
price regression, they find that 35 percent of the incrase in the relative wage of
nonproduction workers is due to improvements in information technology, while a
further 15 percent is due to the international trade, principally outsourcing.
There are two dominant narratives explaining the decline in the labour share,
and accounting for why the wages of low-skilled workers experienced a steeper decline
than those of high-skilled workers. The first story is that improvements in technology
and automation is depressing the demand for low-skilled workers, leading to a fall
in their wages. However, under this story, one would expect the wages of those who
can understand and operate such machines to increase.
Alternatively, taking non-production workers as a grouping, then increases in
capital should increase their marginal product. Support for this is found is provied

in Autor et al. [2003], who find that computer capital sustitutes for workers performing routine, manual non-cognitive task and complements peforming non-routine
problem-solving and complex communications tasks. Therefore, we would expect to
see the wages of production workers falling, and the wages of non-production workers
increasing. However, this effect may be attenuated by the observation made by Autor
et al. [2013] whereby the target of automation moved from production tasks towards
non-manufactirung information-processing tasks.
The second dominant story is that the decline in wages is due to the increase
in international trade. Concretely, a large global workforce of unskilled workers
has entered into the global labour market, and tis may depress the demand for
unskilled workers in developed economies, due to phenomena such as outsourcing
and import competition in product where unskilled workers are an abundant factor.
For example, Acemoglu et al. [2014], taking account of input-output linkages and
general equilibrium effects, find that the accelerating U.S. imports from China from
1999 to 2011 was possible responsible for job losses in the range of 2.0 to 2.4 million,
which if true would have exerted significant downward pressure on wages.
Alternative explanatios for the declining capital share have been proposed, such
as that of Azmat et al. [2012], who find that privatisation is responsible for up to
one-fifth of the decline. However, the methods used in this paper are not capable of
assessing this finding.
This paper will also naturally link itself to the expanding range of literature that
examines whether the capital share of income has been rising over the last fifty years.
A last related strand in the literature that this paper will later examine is that of the
elasticity of substitution. In order for the capital share of income to rise continuously,
along with a rising capital-output ratio, an elasticity of substitution exceeding 1 is
necessary; less formally, diminishing returns will need to set in slowly.
Chirinko [2008] provides an overview of the literature, and finds that while the
estimates have a wide range, a value of 0.4 to 0.6 is most likely given the evidence.

Given that a Cobb-Douglas function assumes a of 1, he infers that this functional

form has little support. This paper will estimate this elasticity for the data under
review, finding that it is not greatly different from 1.

Economic Model and Empirical Approach

This paper will seek to estimate the factor shares through the use of standard production functions. With the assumption of perfect competition and constant returns to
scale, then the respective share in income of a factor equals the marginal product of
that factor [Bertola et al., 2006]. For example, consider the standard Cobb-Douglas
production function:
Y = AK L1
. Under under our two assumptions, then the share of income rewarded to capital is
, while that going to labour is 1 .
To estimate the factor shares going to labour and capital, we will estimate the
logged Cobb-douglas production function which is:

log(V ADD) = 0 1 log(CAP ) + 2 log(EM P )

(1)

Thus, we see that we can indirectly estimate the labour share of income, 1 ,
by running the above regression. Traditionally, these values have been assumed to
be in the range of 0.3 and 0.7, respectively.

3.1

Is = 1?

Given that the Cobb-Douglas function assumes an elasticity of substitution of one,

is only valid if this is the case, one ought to check this assumption. The literature
implies that many industries take on a Cobb-Douglas specification. Balistreri et al.

[2003] test 28 U.S. industries, and fail to reject the Cobb-Douglas specification if 20 of
the 28 industries. Therefore, in order to establish whether these regressions are valid
we will need to estimate the elasticity of substitution. We can do this by estimating
a Constant Elasticity of substitution (CES) production function, which allows to
vary, and which we can impute from the estimates. The CES production function
takes the form:
1

lnQi = 0 ln{L
i + (1 )Ki } + i

3.2

(2)

Dealing with Simultaneity Bias

Marschak and Andrews [1944] noted that the input levels and unobserved productivity shocks may be correlated. More concretely, if a firm experiences a positive
productivity shock, they will raise output, and will achieve this through purchasing
more of the variable inputs such as labour, materials or energy. This will result
in the coefficient estimates on the variable inputs being biased upwards [Levinsohn
and Petrin, 2003]. Whether capital is upwardly or downwardly biased depends on
whether is is correlated or not with the productivity shock. Because the productivity
effect changes over time, it is not fixed and therefore using a fixed effect estimator
will lead to biased and inconsistent results. An possible instrument in this case would
be input prices, as we could see if changing inputs is due to changing input prices.
However, input prices are a weak instrument in this context, changes in the wage
being only weakly correlated with change is labour demanded. Lags are used instead.
Olley and Pakes [1996] attempts to correct this by using investment as a measure
for the unobserved productivity change; if a firm experienes a positive productivity
shock, then they ought to increase investment. However, Doms and Dunne [1998]
note that the time-series of plant-level investment exhibits lumpy behaviour, implying
adjustment costs may be convex. This finding leads Levinsohn and Petrin [2003] to

conclude that changes in investment may not be strictly proportional to changes in

productivity.
It should be noted that while this class of estimators were generally designed for
use with firm panels, they are also applicable to industry panels, as it is reasonable
to assume that the same dynamics may be at play, in the sense that an industry may
be affected by industry-wide productivity shocks that vary over time. If anything,
the problems may even be more acute when it comes to industry level shocks. For
example, Abraham and White [2006] find that the annual persistence of productivity
shocks at an industry level would produce autocorrelation estimates ranging from
0.80 to 0.91, against only 0.37 to 0.41 at a plant level.

Data

All data is taken from the NBER-CES Manufacturing Industry dataset [Becker et al.,
2013]. This is an panel of 473 NAICS industries. The data covers 1958-2009 with
variables such as output, employment, payroll and other input costs, investment,
capital stocks, TFP, and various industry-specific price indexes. For our dependent
variable, we use total value added in all specifications. A number of variables are
generated from the data. For example, in order to distinguish between the factor
shares being allocated to production and non-production workers, we calculate nonproduction workers as being equal to Total Employment minus Production Workers.

Econometric Analysis

Firstly, we run the standard Cobb-Douglas regression as specified in Equation 1. In

Table 3, the only independent variables used are capital and labour, with labour
split into the number of production and non-production workers. The results are
presented in 3.

Table 1: Summary statistics

Name
Variable
NAICS
NAICS 6-digit Codes
YEAR
Year ranges from 58 to 09
EMP
Total employment in 1000s
PAY
Total payroll in $1m
PRODE
Production workers in 1000s
PRODH
Production worker hours in 1m
PRODW
Production worker wages in $1m
VSHIP
Total value of shipments in $1m
MATCOST
Total cost of materials in $1m
VADD
Total value added in $1m
INVEST
Total capital expenditure in $1m
INVENT
End-of-year inventories in $1m
CAP
Total real capital stock in $1m
EQUIP
Real capital: equipment in $1m
PLANT
Real capital: structures in $1m
TFP5
5-factor TFP index 1997=1.000

Mean
327009.662
1983.5
34.814
735.896
25.423
50.64
443.796
4799.495
2620.97
2190.409
156.655
585.429
2757.95
1664.517
1093.433
0.937

Std. Dev.
8889.717
15.009
45.053
1252.867
33.651
66.823
736.828
13196.309
9721.219
4710.187
462.108
1433.618
6388.03
4145.339
2418.355
0.257

N
24596
24596
24167
24167
24167
24167
24167
24167
24167
24167
24167
24162
24167
24167
24167
24167

Table 2: Cross-correlation table

Variables
PRODE PRODH MATCOST
PRODE
1.000
PRODH
0.997
1.000
MATCOST
0.625
0.637
1.000
VADD
0.818
0.830
0.765
INVEST
0.657
0.663
0.701
ENERGY
0.574
0.573
0.642
CAP
0.655
0.655
0.751

VADD

INVEST

ENERGY

CAP

1.000
0.830
0.699
0.791

1.000
0.902
0.931

1.000
0.939

1.000

Labour is split into production and non-production workers, as this will allow us
to examine how their respective factor shares change over time. All results are called
with robust standard errors to correct for heteroskedasticity.

Table 3: Cobb-Douglas Averages Production and Non-Production Workers

(1)
1969

(2)
1979

(3)
1989

(4)
1999

(5)
2009

0.287
(8.89)

0.203
(6.49)

0.162
(5.27)

0.152
(5.29)

0.111
(3.16)

LOG(NPRODE) 0.402
(13.44)

0.421
(14.98)

0.458
(17.26)

0.413
(15.05)

0.411
(12.78)

LOG(CAP)

0.297
(17.26)

0.365
(20.47)

0.391
(21.45)

0.462
(23.48)

0.542
(21.01)

Constant

2.253
(24.80)

2.539
(25.55)

3.001
(28.98)

2.998
(25.30)

2.695
(17.90)

462
0.939

462
0.934

462
0.926

462
0.929

473
0.921

LOG(PRODE)

Observations
Adjusted R2

t statistics in parentheses
Robust Standard Errors

p < 0.05, p < 0.01, p < 0.001

In this table, five regressions are run, with each variable taking the logged value of
the previous 10-year average to eliminate any autocorrelative errors. Thus, for 1969,
in column 1, we have the natural log of the 10-year averages of capital, production
and non-production workers, regressed on the natural log of the 10-year average of
value added, where each industry forms one observation. In this manner, we estimate
an aggregate prodution function that is representative of the decade from 1959-1969.
A similar regression is run for each of the following four decades.
Firstly, in Table 3 the regression has strong explanatory power; more than 92% of
the variation in value added is explained by variation in capital and labour. Secondly,
all variables are significant at the 1% level, most at the 0.1% level. The coefficients
in this regression illustrate marginal productivites, for example in the 60s, a 1%

increase in the volume of production workers would have resulted in approximately

a 29% increase in value added, in aggregate.
A Ramsey Reset test was performed on each estimated model in 3. For all, we
fail to reject the null hypothesis that there are no omitted variables at the 1% level,
and all but one at the 5% level; this implies that the model is well specified.
The White test for heteroskedasticity was also performed on each estimated regression. In general, we reject the null that the error terms exhibit homoskedasticity
at the 1% level in four of the five regressions; we reject five out of five at the 5% level.
For this reason, all regressions are called with robust standard errors, when possible.
We also look at variance infaltion factors, to screen for possible multicollinerity
which would inflate the standard errors. The average variance infaltion factor is less
than four, indicating that the multicollinearity is not high. Thus, it seems the effect
of the averaging is to eliminate the problem identified by Marschak and Andrews
[1944], evident in the high degree of correlation in Table 2.

5.1

Trend in the Cobb-Douglas Regressions

In this table, we see that the share of value added going to production labour (also
known as blue collar labour) has been in continuous decline, declining every decade.
In the 00s, it is just over one-third its value in the 60s. Interestingly, our finding here
may shed new light on the view that the income share of labour began to decline in
the 80s. In our results, nearly half of the 61% drop in marginal productivity occured
during the 70s. Interestingly, there may have been a lag before declines in marginal
productivity crossed over into declines in the labour share.
Interestingly, over the entire period the share of income going to non-production
workers has remained stable, even though it does exhibit a concave trend, peaking
in the 80s.
The income share going to capital has also greatly increased over the periods

analysed, nearly doubling from 0.3 in the 60s to 0.54 in the 00s.

Table 4: Cobb-Douglas Averages - Full Model

(1)
1969

(2)
1979

(3)
1989

(4)
1999

(5)
2009

LOG(PRODE)

0.225
(7.79)

0.153
(5.26)

0.123
(4.27)

0.114
(4.23)

0.0121
(0.40)

LOG(NPRODE)

0.388
(13.42)

0.413
(14.79)

0.435
(15.59)

0.367
(12.28)

0.429
(12.54)

LOG(CAP)

0.205
(6.69)

0.208
(5.41)

0.250
(5.71)

0.376
(7.95)

0.259
(5.92)

0.0147
(0.61)

0.0208
(0.78)

-0.00602
(-0.19)

-0.0562
(-1.68)

0.0722
(2.75)

LOG(MATCOST) 0.166
(6.53)

0.209
(8.91)

0.217
(8.52)

0.222
(9.08)

0.278
(10.99)

Constant

2.082
(13.89)

2.383
(13.84)

2.639
(14.22)

2.365
(11.90)

2.615
(11.91)

462
0.948

462
0.947

462
0.936

462
0.940

473
0.940

LOG(ENERGY)

Observations
Adjusted R2

t statistics in parentheses
Robust Standard Errors

p < 0.05, p < 0.01, p < 0.001

The regression in Table 3 is expanded to include more control variables for each
of the five decades in Table 4. In order to check the robustness of these trends, an
extended Cobb-Douglas regression is run, including the energy and materials factor
input. Tis increases the Adjusted R2 of the model slighly, and has a far-reaching effect
on the coefficients, but does little to change the trends. The variable representing
materials and fuels is significant, though that of energy only become significant for
the 00s.
We see that the share of income going to production labour declines over the
entire period, even becoming insignificantly different from zero in the 00s.
The share of income going to non-production labour over the period increased,

10

though the trend is non-monotonic. Somewhat similarly, the share of income going
to capital increases over the period, but it finishes well beow the peak attained in
the 90s.

5.2

CES Regression

Addopting a cobb-Douglas functional form carries the assumption that the elasticity
of substitution is equal to 1. This is a strict assumpition that we will relax using the
a CES functional form. In this functional form, the elasticity of substitution must
be constant, though it may take on a value different from 1.
Two sets of CES regression are estimated, in line with Equation 2; therefore, delta
is the coefficient on total labour hours in production. In Table 5, we see that delta
declines from 0.723 in the 60s to 0.612 in the 90s.
When we look at the snapshot regressions in Table 6, we see that the share of
income going to labour experienced a steeper decline, going from 0.731 in 1969 to
0.554 in 1999. These estimates are significant at the 0.1% level.
In order the examine the applicability of the Cobb-Douglas regressions, we use
the CES parameter estimates to impute the elasticity of substitution, as =

1
1+ .

As

we see from Table 5, the elasticity of substitution ranges from 1.18 to 0.97 (the 00s
estimation is invalid). In Table 6, it ranges from to 1.07 to 1.2 (th 2009 regression
is invalid). Thus, we see that the estimated elasticity is not too far from what is
required to assume the functional form is a Cobb-Douglas function.

5.3

Levinsohn-Petrin Regression Estimates

In order to deal with the simultaneity bias outlined in the literature review, we use
the Levinsohn-Petrin estimator, outlined by Levinsohn and Petrin [2003]. the essence
of this is that we use an intermediate input energy as a variable that can control for
any productivity shock. The estimates are presented in Table 7 and Table 8. The

11

Table 5: CES Estimates - 10yr Averages

b0
Constant
rho
Constant
delta
Constant
Observations
Adjusted R2

(1)
1969

(2)
1979

(3)
1989

(4)
1999

(5)
2009

1.111
(11.83)

1.438
(9.90)

1.775
(8.98)

2.243
(9.93)

0.221
(9.25)

-0.155
(-1.75)

-0.0997
(-1.01)

0.0293
(0.28)

-0.162
(-1.41)

-18.26
(.)

0.723
(12.91)

0.634
(7.86)

0.496
(4.81)

0.612
(5.56)

0.775
(.)

462
0.898
1.18

462
0.887
1.11

462
0.874
0.97

462
0.889
1.19

473
0.817
-0.05

t statistics in parentheses
sigma

p < 0.05, p < 0.01, p < 0.001

Table 6: CES Estimates - Yearly Snapshots

b0
Constant
rho
Constant
delta
Constant
Observations
Adjusted R2

(1)
1969

(2)
1979

(3)
1989

(4)
1999

(5)
2009

1.286
(11.82)

1.702
(10.33)

2.147
(10.40)

2.293
(8.09)

4.662
(149.17)

-0.170
(-1.78)

-0.104
(-1.02)

-0.221
(-1.93)

-0.0680
(-0.53)

13.94
(.)

0.731
(11.84)

0.623
(7.04)

0.661
(6.58)

0.554
(4.09)

0.908
(.)

462
0.893
1.2

462
0.880
1.11

462
0.877
1.28

473
0.883
1.07

473
0.756
0.06

t statistics in parentheses
Robust Standard Errors

p < 0.05, p < 0.01, p < 0.001

12

regression is run across all observations in the decade, as is done in in Levinsohn and
Petrin [2003].
In Table 7, we see that the contribution of production workers to value-added declines across all decades, with the exception of the 90s when it temporarily increases.
The contribution of non production labour increases slightly over the period.
However, an important anomaly with this regression is the capital coefficient.
With capital exceeding 1 in every decade, we end up rejecting the null hypothesis of
constant returns to scale in every decade. The fact that the capital coefficient sometimes takes a value exceeding 2 leads one to doubt the consistency of this estimator
when applied to an industry panel. It may be the case that the grater persistence of
productivity shock in an industry renders this estimator biased and inconsistent.
Nevertheless, it is useful to note that even using this estimator the coefficient
declines in every decade, in both specifications of the model.

Table 7: Levinsohn-Petrin Estimates - Full Model

(1)
60s

(2)
70s

(3)
80s

(4)
90s

(5)
00s

0.293
(8.74)

0.195
(9.56)

0.141
(5.08)

0.188
(7.61)

0.0930
(2.59)

LOG(NPRODE) 0.385
(12.15)

0.461
(16.79)

0.452
(19.10)

0.356
(13.18)

0.441
(11.54)

LOG(CAP)

1.332
(8.20)

1.201
(3.86)

2.212
(5.67)

2.251
(8.49)

1.980
(4.06)

Observations
Adjusted R2

4620

4620

4620

4653

4729

LOG(PRODE)

t statistics in parentheses
Robust Standard Errors

p < 0.05, p < 0.01, p < 0.001

13

Table 8: Levinsohn-Petrin Estimates - Production Hours

(1)
60s

(2)
70s

(3)
80s

(4)
90s

(5)
00s

LOG(PRODH) 0.571
(23.22)

0.514
(19.20)

0.477
(16.76)

0.460
(17.50)

0.457
(19.12)

LOG(CAP)

1.842
(8.66)

1.988
(3.99)

4.590
(15.67)

3.222
(7.67)

3.635
(4.42)

Observations
Adjusted R2

4620

4620

4620

4653

4730

t statistics in parentheses
Robust Standard Errors

p < 0.05, p < 0.01, p < 0.001

5.4

IV Regressions

In order to further examine the robustness of the results, an instrumental variable

regression is run where the lagged level of the variable input, labour, is used as the
instrument for labour.
Two batteries of regressions are run in order to get estimates. First, in Table 9,
the IV regression is run over all the observations within a decade, with the caveat that
this estimator does not control for fixed effects. Driscoll-Kraay standard errors are
reported in order the attenuate any t-stat inflation caused by possible autocorrelation.
In Table 9, we see that the coefficient on labour declines across the entire sample
period. Conversely, the coefficient on capital rises by more than labour has fallen.
We complement this regression by running a series of IV snapshots, presented
in Table 10; that is, regression run on the observations within a single year only.
This eliminates any problems hat would come from not controlling for fixed effect or
autocorrelation, but it prevent from taking full advantage of the panel features.
We see in Table 10 that the results very closely mirror those just discussed. The
coeffiecnt on labour does fall, while the coefficient on capital rises.

14

Table 9: IV Estimates - Production Hours

(1)
60s

(2)
70s

(3)
80s

(4)
90s

(5)
00s

LOG(PRODH) 0.590
(96.00)

0.496
(46.52)

0.511
(28.93)

0.462
(65.71)

0.456
(65.56)

LOG(CAP)

0.377
(61.75)

0.465
(43.04)

0.482
(31.08)

0.551
(104.06)

0.612
(53.01)

Constant

1.070
(46.55)

1.341
(28.76)

1.813
(49.25)

1.864
(68.12)

1.608
(31.59)

4620
0.887

4620
0.843

4620
0.848

4642
0.871

4730
0.875

Observations
Adjusted R2

t statistics in parentheses
Driscoll-Kraay Standard Errors

p < 0.05, p < 0.01, p < 0.001

Table 10: IV Snapshot Estimates - Production Hours

(1)
1969

(2)
1979

(3)
1989

(4)
1999

(5)
2009

LOG(PRODH) 0.580
(23.60)

0.509
(19.29)

0.452
(17.82)

0.511
(17.47)

0.458
(11.87)

LOG(CAP)

0.378
(19.45)

0.477
(21.83)

0.544
(25.18)

0.544
(21.33)

0.650
(18.00)

Constant

1.286
(14.56)

1.570
(14.50)

1.784
(15.35)

1.859
(14.50)

1.298
(6.96)

462
0.894

462
0.880

462
0.876

473
0.885

473
0.861

Observations
Adjusted R2

t statistics in parentheses
Driscoll-Kraay Standard Errors

p < 0.05, p < 0.01, p < 0.001

15

5.5

Fixed Effect Estimates

For completeness, a fixed effect estimator is also run on the data. We find that
the coefficients on this to be somewhat erratic. Consider the coefficient on capital,
which rises from around0.6 in the 60s to 1.75 in the next decade, only to fall to 1
in the decade after. In contrast to most of the other estimators, there is no clear
trend exhibited. This is inline with with what Levinsohn and Petrin [2003] found;
they found that the fixed effect estimator is the most incompatible with all other
estimators for firm data. This is because there is no fixed effect; in our case the
productivity shock varies within industry over time.

Table 11: Fixed Effects Estimates

(1)
60s

(2)
70s

(3)
80s

(4)
90s

(5)
00s

LOG(CAP)

0.642
(16.87)

1.754
(22.94)

0.993
(10.10)

0.821
(12.61)

0.616
(6.31)

LOG(PRODH)

1.029
(34.31)

0.542
(6.27)

0.503
(6.00)

0.665
(17.70)

0.634
(11.60)

Constant

-2.199
(-12.36)

-7.794
(-20.60)

-1.848
(-4.03)

-0.812
(-1.93)

1.019
(1.62)

4620

4620

4620

4653

4730

Observations
Adjusted R2

t statistics in parentheses
Driscoll-Kraay Standard Errors

p < 0.05, p < 0.01, p < 0.001

Interpretation of Results

From all of the above regressions, a few things are clear.

First, the coefficient on labour has declined over time, in most econometric specifications of the production function. This indicates that the marginal productivity
of labour has declined since the sixties. This has resulted in the share of value

16

added going to labour declining in turn, a fact that has been mostly verified by the
literature.
Interestingly, when we decompose labour down into production and non-production
workers, we see that the share of income (adn the marginal productivity) of nonprduction workers has remained approximately stable, while that of production wrokers
has declined relatively steeply.
Recalling the literature review, it was stated that if technology was the dominant
story behind this structural change, then it would have been likely that the marginal
productivity of non production workers would have increased. As this does not seem
to have occurred, our results would seem to favour the trade story behing the decline
of labour.
However, perhaps the most interesting result is that the decline in marginal productivity seems to have begun before the 80s, when the labour share started declining. This also favours the trade story, given that there was a well-known productivity
slowdown in the 70s.
Some important caveats need to be atttached. Firstly, nonproduction labour is a
broad category in and of itself; it is simply everyone who does not work directly with
production, and so would include secretaries to executives. Therefore, the stability o
returns to this broad category could mask a great deal of heterogeneity in marginal
productivity underneath.
Secondly, the proxy was simply the number of production and non production
workers. It is possible that the number of workers would not change, but one group
could work much more intensively withing a given year. This is unlikely for nonproduction workers, and in various specification the number of production hours
was included explicity as a variable. It is also worth noting that in the correlogram
production hours and number of production workers were extremenly correlated 0.996 - such that one could almost say they are the same variable.

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Conclusion

The analysis allow us to make a number of conclusions.

First, the estimation strategy of taking 10 year averages and using each industry
as an observation seems to have been a successful specification strategy. The model is
well specified according to the Ramsey RESET Test, and multicollinearity is not an
issue. In addition, the trends in the coefficient ar robust to a wide range of different
estimation strategies.
Second, the new empirical contribution of this paper is that the decline in the
marginal productivity of production labour began in the 1970s. Most studies support
the view that this onyl started in to 80s. A possible reconciliation between these
two views is that it took time for the market to reduce the wage down to its level
of marginal productivity. In that sense, the regressions are telling us the forward
labour share.
Can these regressions identify the cause of the labour share shrickage; the trade
vs. technology question? Two points stand against the idea that technology ws
responsible. First, the idea that technology was responsible for the decline in the
labour share is incompatible with the fact that this decline commenced in the 70s, in
the midst of a productivity slowdown. However, as Nordhaus [2004] found, the productivity slowdown was concentrated in energy-intensive sectors, so the technology
story cannot be completely dismissed.
Second, if technology was the driver, then one ought to have seen an increase in the
share of capital going to non-production workers. Admittedly, the non-production
workers variable is broad and may hide some heterogeneity within that category.
While no definitive conclusion can be reached here, the balance of the findings seem
to go against the idea that technology is responsible.
Could the decline have been due to the growth of international trade? Given
the countries have in general become more open to trade in the post-WW2 era, this

18

cannot be immediately ruled out. However, the wherewithal to answer this question
are not in this dataset, given that there is no information on international trade.

19

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