The US labour share of income: What shocks matter?

We propose a novel methodological approach to disentangle the main structural shocks affecting the US labour share of income during the immediate post-war era (1948Q!-1984Q4) and the Great Moderation (1985Q1-2018Q3). We motivate a SVAR model in aggregate demand, unemployment rate, real wage and labour productivity, which captures key components of the labour share. The paper then (i) demonstrates statistical support for separating the sample into two periods; (ii) employs the model to identify four structural innovations: aggregate demand, labour supply, wage bargaining, and productivity; (iii) quantifies the dynamic responses of the labour share to each structural shock; (iv) compares these results across the two periods; and (v) indicates their robustness to estimation of the impulse responses with stationary variables or in levels, and via local projections. The results show that the two periods differ substantially. First, in order of magnitude, the labour share responded mainly to productivity, aggregated demand, and wage bargaining shocks during the immediate post-war era; whereas wage bargaining, productivity, and aggregate demand shocks mattered most during the Great Moderation. Second, these impulse responses are statistically significantly different across the two periods for wage bargaining and productivity shocks. Increased (decreased) sensitivity to wage bargaining (productivity) shocks during the Great Moderation suggests that the decline in the labour share is driven by the factors that govern wage setting.