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class="mdc-c-link__label___Pfqtd_2734c4f">MGI Research</span></a><div class="mdc-u-grid"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f"><h1 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-2"><div>A new look at the declining labor share of income in the United States</div></h1><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><div class="mck-u-links-inline mck-c-generic-item__description"><time datetime="2019-05-22T00:00:00Z">May 22, 2019</time> | Discussion Paper</div></div></div></div></div></div></div></div></div></div></div></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing mdc-u-grid mdc-u-grid-gutter-xxl"><section data-layer-region="article-body-header" class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-animation-blur-in-400 byline-share-container"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-8 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-8 mdc-u-ts-9"><span> </span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/james-manyika" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">James Manyika</span></a> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/jan-mischke" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Jan Mischke</span></a> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Jacques Bughin </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Lola Woetzel </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/mekala-krishnan" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Mekala Krishnan</span></a><span> </span></span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Samuel Cudre</span></span></div><div class="mdc-u-grid-col-md-start-8 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-8 mdc-u-grid-col-lg-end-11 ArticleContent_mck-c-article-content__share-tools__kWRRw"></div></section><section class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-animation-blur-in-400"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-5"><div class="mck-u-links-inline">Globalization, technology, and other often-cited factors may not be the main causes.</div></div></div></section><main data-layer-region="article-body" class="mdc-u-grid mdc-u-grid-gutter-xxl"><div class="mdc-u-grid mdc-u-grid-col-1 mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div class="mdc-o-content-body mck-u-dropcap"><div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="DownloadsSidebar_mck-c-downloads-sidebar__iFmyt mck-o-xs-right-span"><div data-layer-region="downloads-right-rail"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f"></h3><div><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f"><a data-component="mdc-c-link" href="/~/media/mckinsey/featured insights/employment and growth/a new look at the declining labor share of income in the united states/mgi-a-new-look-at-the-declining-labor-share-of-income-in-the-united-states.pdf" class="DownloadsSidebar_mck-c-downloads-sidebar__download-link__fPqFQ mdc-c-link___lBbY1_2734c4f" target="_blank" data-layer-event-prefix="Download Link" data-layer-action="click" data-layer-report-type="" data-layer-file-name="mgi-a-new-look-at-the-declining-labor-share-of-income-in-the-united-states" data-layer-report-name="mgi-a-new-look-at-the-declining-labor-share-of-income-in-the-united-states>"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-download-icon"></span><span class="mdc-c-link__label___Pfqtd_2734c4f"> (PDF-849 KB)</span></a></div></div></div></div> <p><strong>Labor’s share of national income</strong>—that is, the amount of GDP paid out in wages, salaries, and benefits—has been declining in developed and, to a lesser extent, emerging economies since the 1980s. This has raised concerns about <a href="/featured-insights/employment-and-growth/poorer-than-their-parents-a-new-perspective-on-income-inequality">slowing income growth</a>, inequality, and loss of the consumer purchasing power that is needed to fuel demand in the economy. The decline has been much discussed and the rising power of companies vis-à-vis workers—whether from new technology, globalization, the hollowing out of labor unions, or <a href="https://www.iza.org/publications/dp/10756/the-fall-of-the-labor-share-and-the-rise-of-superstar-firms">market consolidation</a>—has shaped much of that discussion.</p> <div data-module-category="" class="PullQuote_mck-c-pullquote__DbaQ5 mck-o-sm-right-span"><blockquote data-component="mdc-c-blockquote" class="PullQuote_mck-c-blockquote__6n21p PullQuote_mck-c-blockquote--hide-quotes__CpGpg mdc-c-blockquote mdc-c-blockquote--is-quotes___TozKo_2734c4f"><p>The labor share of income in 35 advanced economies fell from around 54 percent in 1980 to 50.5 percent in 2014.</p></blockquote></div> <p>In <em><a href="/~/media/mckinsey/featured insights/employment and growth/a new look at the declining labor share of income in the united states/mgi-a-new-look-at-the-declining-labor-share-of-income-in-the-united-states.pdf">A new look at the declining labor share of income in the United States</a></em> (PDF–849KB) we examine the relative importance of different factors in the United States through a focus on the complement of the labor share decline—that is, the rise in capital share of income. We decompose this into the role of depreciation, capital-to-output ratios, and returns on invested capital. Linking this decomposition with a microanalysis of 12 key sectors allows us to identify the relative importance of the factors that have contributed to the labor share decline. While our findings confirm the relevance of the most commonly cited factors, including globalization and <a href="https://academic.oup.com/qje/article-abstract/129/1/61/1899422">technology adoption</a>, they also suggest that additional trends often absent from the current debate—including boom and bust effects from commodity and real estate cycles and rising depreciation, including from a shift to more intangible capital such as intellectual property—played an even more central role.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="" class="mck-o-edge-to-edge TableOfContents_mck-c-table-of-contents__zeYey"><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div class="mdc-u-grid mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><h6 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-10 TableOfContents_mck-c-table-of-contents__heading__nQD1F">TABLE OF CONTENTS</h6><ol class="mdc-u-ts-7 TableOfContents_mck-c-table-of-contents__list__ivUca"><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-1" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">The labor share of income is declining</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-2" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">12 sectors explain much of the decline</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-3" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">The most commonly cited factors may not be the main ones</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-4" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Our findings raise important further research and policy questions</span></a></li></ol></div></div></div></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-E6D1CB20CD8A435DBFE760EB2419A0D2-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label=" A new look at the declining labor share of income in the United States"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-1" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 1</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>The labor share of income is declining</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>The labor share of income in 35 advanced economies fell from around 54 percent in 1980 to 50.5 percent in 2014. In some advanced economies including France and Germany, labor income shares reached the lowest level of the past half century just before the global financial crisis of 2008, although the patterns in individual countries varied.</p> <p>Developing economies have also experienced the same phenomenon, albeit to a lesser extent. Available studies suggest that the labor share of income fell from 39 percent in 1993 to 37.4 percent in 2014, a drop of about 4 percent.</p> <p>The decline in labor share of income in the United States since the turn of the millennium has been particularly marked and is the focus of our analysis. Official data from the Bureau of Labor Statistics (BLS) suggest that, while the labor share had already started to decrease in the 1960s, three-fourths of the entire post-1947 decline occurred between 2000 and 2016 (Exhibit 1). The steepest part of the decline—from 63.3 percent in 2000 to 56.7 percent in 2016—followed a moderate downward drift in the 1980s and early 1990s, and a slight recovery in the late 1990s.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 1</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex1.svgz?cq=50&cpy=Center"/><img alt="Three-fourths of the decrease in labor share in the United States since 1947 has come since 2000." src="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex1.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <p>While the decline of labor’s share of income influences workers’ compensation, our analysis suggests that it is not the primary reason for the slow income growth and growing gap between median wages and labor productivity observed in the United States.</p> <p>To better understand the phenomenon, we break down <a href="http://www.oecd.org/eco/decoupling-of-wages-from-productivity/">the gap between historical productivity growth and median wage growth</a>. We estimate that declines in the labor share of income explain 18 percent of the gap between median wages and historic productivity growth rates. Weak productivity growth was the most influential factor, accounting for half of the gap. The disproportionate distribution of income gains to highly paid workers, reflected in a growing gap between average and median wages, accounts for 19 percent of the gap, a similar contribution to the labor share. The growing wedge between prices of consumption and production accounts for roughly 9 percent of the gap.</p> <p>Nonetheless, the decline in labor share remains a sizable factor for income. As an illustration, had it remained at the levels of 1998, all else being equal, average worker pay might be higher in real terms by roughly $3,000 per year today.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-0D1A6444A60B48CEAF656E1C48AB55A8-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label=" A new look at the declining labor share of income in the United States"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-2" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 2</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>12 sectors explain much of the decline</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>Twelve sectors that make up about one-third of employment and 44 percent of economic output explain the overall decline in labor share or increase in capital share. These sectors represent a broad and diverse set of economic activities. They are: mining and quarrying; construction; real estate; coke and refined petroleum; motor vehicles; pharmaceuticals and chemicals; computer, electronics, and optical products; publishing, audiovisual, and telecom; computer programming and consulting; information services; wholesale and retail, and transportation and storage (Exhibit 2).</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 2</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex2.svgz?cq=50&cpy=Center"/><img alt="Twelve sectors account for most of the increase in capital share." src="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex2.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <p>These sectors are, on average, more globalized, more digitized, and more capital-intensive than the overall economy—but there are many exceptions, including labor-intensive sectors such as construction and retail.</p> <p>Notably, eight of the 12 sectors experienced faster-than-average wage growth, in most cases supported by above-average productivity growth. Almost all of these sectors have experienced a decline in labor share of more than five percentage points between 1998 to 2002 and 2012 to 2016. The rising economic size of sectors with low labor share, such as real estate, also played a role.</p> <p>The academic literature has put forward a range of reasons for the decline in labor’s share of income but it diverges on which factors and mechanisms matter most. For our analysis, we cluster the main drivers into the following five broad categories:</p> <p><em><strong>Capital deepening, substitution, and automation.</strong></em> Improvements in technology, such as more powerful computers and industrial robots, are reflected in lower prices for investment goods; this increases the incentive to substitute capital for labor, perhaps enough to make automation and the displacement of labor economical in the first place. If labor plays less of a role in production, for example through lower employment, its share of income can decline.</p> <p><em><strong>“Superstar” effects and consolidation.</strong></em> Recent research has shown that <a href="/featured-insights/innovation-and-growth/superstars-the-dynamics-of-firms-sectors-and-cities-leading-the-global-economy">superstar firms</a> are reaping rising shares of profits and value added. This is particularly the case in knowledge-intensive sectors, so that more value goes to capital owners relative to labor. Such consolidation and rise of superstars can also go together with lack of competition, particularly in highly regulated sectors or in domains where intellectual property gives companies a competitive edge, for example due to strong patents.</p> <p><em><strong>Globalization and labor bargaining power.</strong></em> Increased trade competition from imports made in lower-cost countries and the threat of <a href="https://www.brookings.edu/bpea-articles/the-decline-of-the-u-s-labor-share/">offshoring</a> (exporting jobs to such countries) can put pressure on wages and employment. In some sectors, the erosion of labor market institutions such as unions weakens the bargaining power of workers as well.</p> <div data-module-category="" class="PullQuote_mck-c-pullquote__DbaQ5 mck-o-lg-center"><blockquote data-component="mdc-c-blockquote" class="PullQuote_mck-c-blockquote__6n21p PullQuote_mck-c-blockquote--hide-quotes__CpGpg mdc-c-blockquote mdc-c-blockquote--is-quotes___TozKo_2734c4f"><p>Rapidly rising commodity prices in the energy and minerals sector tend to increase profits (and investment) and reduce labor’s share of income.</p></blockquote></div> <p><em><strong>Higher depreciation, including due to a shift to more intangible capital.</strong></em> Production processes in recent decades have undergone changes, particularly toward a greater use of capital for assets in the form of <a href="https://ideas.repec.org/p/bge/wpaper/927.html">intangibles and intellectual property products (IPP)</a>, such as patents, R&D, and software, which have faster depreciation cycles than buildings and machines. Furthermore, the economy is working through a capital overhang—an increase in capital-to-output ratios—that stems from the investment boom before the financial crisis and the output collapse that followed. Both of these factors increase the depreciation share of income, which reduces the amount available to either labor or capital, in net terms.</p> <p><em><strong>Supercycles and boom-bust.</strong></em> <a href="/capabilities/sustainability/our-insights/how-technology-is-reshaping-supply-and-demand-for-natural-resources">Rapidly rising commodity prices</a> in the energy and minerals sector tend to increase profits (and investment) and reduce labor’s share of income. Other sectors such as real estate and construction have exhibited pronounced boom-bust sequences that also led to shifts in capital—and hence labor—share of income.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-269E73468A9B449E991BA3B67AAF04C5-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label=" A new look at the declining labor share of income in the United States"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-3" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 3</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>The most commonly cited factors may not be the main ones</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>For our analysis, we identify which industries have contributed most to the increase in capital share, quantifying a “mix” effect (the importance of each sector in terms of relative value added) and a “within” effect (the rise of capital share within an industry).</p> <p>Second, we investigate which fraction of gross operating surplus is an actual increase in net profits and which fraction is attributed to depreciation. We can use the calculated increase in depreciation directly to assess that effect and understand from sector deep dives the factors that drove it.</p> <p>Third, to help us distinguish between rising returns versus capital deepening, we adapt a DuPont decomposition typically used in finance to further break down net operating surplus into its underlying components, notably returns on invested capital vs. capital to output ratios.</p> <p>Finally, we use a micro sector lens to understand the dynamics across and within sectors, combining the above analysis with additional sector data and industry expertise.</p> <p>We use those insights to map sectors to the five leading explanations for the decrease in labor share identified above. For each sector and each of the five explanations, we conduct a simple assessment to designate them as “limited,” “relevant,” or “highly relevant” and use that to allocate the sector’s contribution to the overall labor share decline to those explanations.</p> <p>While our decompositions are mathematically precise, the relevance we assign to each driver in each sector is based on informed judgements and our knowledge of the respective industry.</p> <p>We find that that the main drivers for the decline in the labor share of income since 1999 are as follows, starting with the most important (Exhibit 3):</p> <ul> <li>Supercycles and boom-bust (33 percent)</li> <li>Rising depreciation and shift to IPP capital (26 percent)</li> <li>Superstar effects and consolidation (18 percent)</li> <li>Capital substitution and technology (12 percent)</li> <li>Globalization and labor bargaining power (11 percent)</li> </ul> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 3</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex3.svgz?cq=50&cpy=Center"/><img alt="Five leading forces drove the capital share increase." src="/~/media/mckinsey/featured%20insights/employment%20and%20growth/a%20new%20look%20at%20the%20declining%20labor%20share%20of%20income%20in%20the%20united%20states/svgz-new-look-declining-labor-share-ex3.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <p>We estimate that <em>supercycles and boom-bust effects</em>—particularly in extractive industries and real estate—account for one-third of the surge in gross capital share since the turn of the millennium, even after depreciation. In two sectors, mining and quarrying and coke and refined petroleum, capital share increases were led by increased returns on invested capital and higher profit margins during a sharp and prolonged rise in prices of metals, fuels, and other commodities fed by China’s economic expansion in the 2000s. Technological advances then buffered some of the impact of the later decline in oil prices on profitability. Energy prices and cycles have affected other sectors, but to a lesser extent. This includes firms in the transportation and storage sector, such as truckers, shippers, and airlines, where profits are correlated with economic cycles.</p> <p>Housing-related industries also contributed. The capital-intensive real estate sector grew in importance in terms of gross value added during the bubble.</p> <p><em>Rising and faster depreciation</em> is the second-largest contributor to the increase in gross capital share, accounting for roughly one-fourth (26 percent) of the total. Depreciation matters for labor share analyses, because the baseline, GDP, is a “gross” metric before depreciation; if more capital is consumed during the production process, there is less net margin to be distributed to labor or capital. This fact receives little attention in the literature. One reason depreciation has become such a large factor in driving up the capital share is the increase in the share of intellectual property products in investment—software, databases, and research and development—which depreciates faster than traditional capital investments such as machinery and equipment or buildings. The increase has been substantial: the share of IPP capital rose from 5.5 percent of total net capital stock for the total economy in 1998 to 7.3 percent in 2016, an increase of almost 33 percent.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="bottom-right" class="StatementDisruptor_mck-c-statement-disruptor__iOBdi mck-o-edge-to-edge" data-module-name="statement-disruptor"><div><div class="StatementDisruptor_mck-c-statement-disruptor__background-container__p_cFW"><div class="StatementDisruptor_mck-c-statement-disruptor__background-image-container__es__n"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-statement-disruptor-900933E4D6F746FDBE980F6EFB874F50" role="img" aria-label=" A new look at the declining labor share of income in the United States"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div></div></div><div class="StatementDisruptor_mck-c-statement-disruptor__content-container__2bGvV"><div class="StatementDisruptor_mck-c-statement-disruptor__content__KNhFy"><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div class="mdc-u-grid mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-4 mdc-u-grid-col-md-end-10 mdc-u-grid-col-lg-start-4 mdc-u-grid-col-lg-end-10"><div class="mck-c-statement-disruptor__title-container"><p class="StatementDisruptor_mck-c-statement-disruptor__text-content__7xNDN">We estimate that supercycles and boom-bust effects—particularly in extractive industries and real estate—account for one-third of the surge in gross capital share since the turn of the millennium, even after depreciation.</p></div></div></div></div></div></div></div></div></div> <p>Another factor driving higher depreciation is a “capital overhang” from the investment boom and ensuing output bust. Slightly elevated capital-to-output ratios (net capital stock over value added) mean that there is also, in historic terms, more capital relative to output that depreciates and therefore higher depreciation shares of output.</p> <p>We estimate that <em>superstar effects</em> <em>and consolidation</em> collectively contribute about one-fifth of the capital share increase. We base this estimate on analyzing which industries actually saw an increase in ROIC as a direct driver of capital share increases and where the increase goes hand-in-hand with (and may partially result from) rising consolidation or rise of superstar firms. Such patterns seemed particularly pronounced in several industries, and for each of them, superstar effects were marked as a “highly relevant” or “relevant” driver. Telecommunications, media and broadcasting, for instance, experienced significant rises in returns. The transportation and storage industry went through another round of airline consolidation and recovered from the crisis to ROIC levels that are high by historic standards. The pharmaceutical and chemicals as well as information and computer services sectors are also known for superstar effects. Finally, wholesale and retail as well as refining also went through a spurt in returns and consolidation.</p> <div data-module-category="" class="PullQuote_mck-c-pullquote__DbaQ5 mck-o-sm-left-span"><blockquote data-component="mdc-c-blockquote" class="PullQuote_mck-c-blockquote__6n21p PullQuote_mck-c-blockquote--hide-quotes__CpGpg mdc-c-blockquote mdc-c-blockquote--is-quotes___TozKo_2734c4f"><p>The weakening of labor bargaining power under pressure from globalization is, in our analysis, not as important as other factors for the total economy in the time frame we focus on.</p></blockquote></div> <p>The fourth-most-important factor driving the increase in capital share of income appears to relate to a <em>substitution of capital for labor</em> through factors including decreasing technology prices and better capabilities of machines. We estimate that this effect accounts for 12 percent of the increase in capital share in the industries we analyzed. For this estimate, we note this driver as “relevant” or “highly relevant” for those industries that experienced a notable increase in capital-to-output ratios (as a direct driver of capital share increases), and where industry interviews suggest that such increases are partially driven by investment, including in technology. This pattern seemed most pronounced in computer and electronics and motor vehicles (automation of production), pharmaceuticals and chemicals (drug manufacturing), information services (investment in data processing and stocking facilities), and, to a lesser extent, wholesale and retail trade (digitization of sales channels and supply chains) as well as mining and quarrying (rapid productivity improvements in shale oil and gas extraction).</p> <p>One of the most discussed reasons for labor’s declining share of income—the weakening of labor bargaining power under pressure from <em>globalization</em>—is, in our analysis, not as important as other factors for the total economy in the time frame we focus on. It explains 11 percent of the overall decline. To arrive at this estimate, we mark this effect as “relevant” or “highly relevant” in sectors that saw profit margin increases (for example through pressure on costs and exit of less competitive firms) or capital-output ratio increases alongside comparatively weak employment, low wage growth, or a rapid decline in the rate of employees covered by union contracts. We then corroborated these indicators with industry interviews. Globalization and labor bargaining power did have a very large and visible impact in a few of our selected sectors, including automobile manufacturing, where declining union coverage and falling wages as production shifted to the southern United States and Mexico increased the capital share. However, the overall economy effect is limited due to the relatively small size of this industry (approximately 2 percent of the total increase in capital share of income is related to motor vehicles). To a lesser extent, the computer and electronics sector, which contributed 9 percent to the total increase in capital share, was also affected by growing globalization of supply chains and offshoring, although other factors played an important role for this sector.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-BEBCBEDDC4F246BD8BC324DBB7AC5FB5-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label=" A new look at the declining labor share of income in the United States"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-4" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 4</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Our findings raise important further research and policy questions</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>Looking ahead, our analysis might suggest that the labor share decline could be dampened but continue. According to the most recent BLS data, the labor share was relatively stable in 2017–18. Looking at the five drivers in the past and their potential trajectory ahead, commodity cycle effects should taper off or reverse; energy prices have recovered since 2017 but are still well below their 2011–14 peak, although technological advances in shale oil and gas may sustain profitability in the sector. <a href="/featured-insights/innovation-and-growth/globalization-in-transition-the-future-of-trade-and-value-chains">Global value chains are shifting</a>, so that offshoring for labor cost arbitrage has decreasing importance.</p> <p>The ongoing shift to intangibles will likely continue to raise depreciation, however. Superstar effects as well as consolidation could also continue, although policy changes or hypercompetition might alter the trajectory. Capital substitution and technology deployment look set to continue or even accelerate, with significant uncertainty around the elasticities of substitution between capital and labor and the respective impact on the labor share. Our research suggests that this has not been a pronounced factor in the past, however.</p> <p>In regard to sector mix effects, forecasts of gross operating surplus and value added until 2030 suggest that the labor share may benefit from a shifting economic structure toward sectors that currently display a higher labor share, such as healthcare and social work activities, and a moderate downward adjustment in economic weight of some sectors with a typically low labor share, such as real estate and coke and refined petroleum.</p> <p>This analysis represents our preliminary perspective to help foster discussion and dialogue on the topic of declining labor share. We continue to research these issues and will adjust and refine our findings as we learn more. Nonetheless, our initial insights already raise some important potential research questions and policy implications.</p> <p>Policy makers may want to focus their attention on driving productivity growth to help address wage stagnation. Our research suggests that continued digitization and sustaining strong demand and investment will be critical, and that the <a href="/featured-insights/regions-in-focus/solving-the-productivity-puzzle">benefits to productivity will likely outweigh any negative impact</a> on labor share from capital substitution if the past 20 years are a good indicator for what’s ahead.</p> <p>Labor share declines have, in comparison, a smaller influence on wages. A large share of the decline is more technical than distributional (depreciation) and linked to a structural shift of investment toward intangibles. Another large share relates to supercycle and boom-bust effects, which are difficult to address in isolation. Actionable policies might have to focus on measuring superstar effects and ensuring a competitive environment across sectors. Policy makers may also need to mitigate the consequences of globalization where the changes in economic structure take place too rapidly for workers to adapt. They will need to ensure that technology works alongside human labor to make it more productive rather than substitute it; this would include retraining workers.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-disruptor-signup mck-o-lg-right-span mck-u-inline-module-border-top mck-u-inline-module-border-bottom mck-u-screen-only" data-layer-region="disruptor-signup"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f"><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-4 DisruptorSignUp_mck-c-disruptor-signup__heading__JR4i0"><div>Stay current on your favorite topics</div></h2></div><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--align-left"><a data-component="mdc-c-link" href="/user-registration/register-mvc" class="mdc-c-button___U4iY2_2734c4f 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A new perspective on income inequality</div></a></h6></div></div></div></div></div></div></div></main></div><script id="__NEXT_DATA__" type="application/json">{"props":{"pageProps":{"locale":"en","dictionary":{},"sitecoreContext":{"route":{"name":"A new look at the declining labor share of income in the United States","displayName":"A new look at the declining labor share of income in the United States","fields":null,"databaseName":"web","deviceId":"fe5d7fdf-89c0-4d99-9aa3-b5fbd009c9f3","itemId":"c1259d55-baf4-429a-92f6-ff717870884b","itemLanguage":"en","itemVersion":4,"layoutId":"ae753eb4-a035-40b4-83bf-4b4438df6742","templateId":"683910db-02ba-40ba-92e7-726c880160a9","templateName":"ArticleJSS","placeholders":{"jss-main":[{"uid":"232bb7e9-289f-492d-a916-2b6185e44a84","componentName":"ArticleTemplate","dataSource":"","fields":{"data":{"articleTemplate":{"title":{"jsonValue":{"value":"A new look at the declining labor share of income in the United States"}},"sEOTitle":{"value":"Labor share of income: A new look at the decline in the United States"},"description":{"jsonValue":{"value":"Globalization, technology, and other often-cited factors may not be the main causes."}},"sEODescription":{"value":"Oft-cited factors like globalization, technology, and others may not be painting the full picture in the waning labor share of income."},"displayDate":{"jsonValue":{"value":"2019-05-22T00:00:00Z"}},"body":{"value":"[[DownloadsSidebar]]\n\u003cp\u003e\u003cstrong\u003eLabor\u0026rsquo;s share of national income\u003c/strong\u003e\u0026mdash;that is, the amount of GDP paid out in wages, salaries, and benefits\u0026mdash;has been declining in developed and, to a lesser extent, emerging economies since the 1980s. This has raised concerns about \u003ca href=\"/featured-insights/employment-and-growth/poorer-than-their-parents-a-new-perspective-on-income-inequality\"\u003eslowing income growth\u003c/a\u003e, inequality, and loss of the consumer purchasing power that is needed to fuel demand in the economy. The decline has been much discussed and the rising power of companies vis-\u0026agrave;-vis workers\u0026mdash;whether from new technology, globalization, the hollowing out of labor unions, or \u003ca href=\"https://www.iza.org/publications/dp/10756/the-fall-of-the-labor-share-and-the-rise-of-superstar-firms\"\u003emarket consolidation\u003c/a\u003e\u0026mdash;has shaped much of that discussion.\u003c/p\u003e\n[[PullQuote 1]]\n\u003cp\u003eIn \u003cem\u003e\u003ca href=\"/~/media/mckinsey/featured insights/employment and growth/a new look at the declining labor share of income in the united states/mgi-a-new-look-at-the-declining-labor-share-of-income-in-the-united-states.pdf\"\u003eA new look at the declining labor share of income in the United States\u003c/a\u003e\u003c/em\u003e (PDF\u0026ndash;849KB) we examine the relative importance of different factors in the United States through a focus on the complement of the labor share decline\u0026mdash;that is, the rise in capital share of income. We decompose this into the role of depreciation, capital-to-output ratios, and returns on invested capital. Linking this decomposition with a microanalysis of 12 key sectors allows us to identify the relative importance of the factors that have contributed to the labor share decline. While our findings confirm the relevance of the most commonly cited factors, including globalization and \u003ca href=\"https://academic.oup.com/qje/article-abstract/129/1/61/1899422\"\u003etechnology adoption\u003c/a\u003e, they also suggest that additional trends often absent from the current debate\u0026mdash;including boom and bust effects from commodity and real estate cycles and rising depreciation, including from a shift to more intangible capital such as intellectual property\u0026mdash;played an even more central role.\u003c/p\u003e\n[[TableOfContents]] [[SectionHeader 1]]\n\u003cp\u003eThe labor share of income in 35 advanced economies fell from around 54 percent in 1980 to 50.5 percent in 2014. In some advanced economies including France and Germany, labor income shares reached the lowest level of the past half century just before the global financial crisis of 2008, although the patterns in individual countries varied.\u003c/p\u003e\n\u003cp\u003eDeveloping economies have also experienced the same phenomenon, albeit to a lesser extent. Available studies suggest that the labor share of income fell from 39 percent in 1993 to 37.4 percent in 2014, a drop of about 4 percent.\u003c/p\u003e\n\u003cp\u003eThe decline in labor share of income in the United States since the turn of the millennium has been particularly marked and is the focus of our analysis. Official data from the Bureau of Labor Statistics (BLS) suggest that, while the labor share had already started to decrease in the 1960s, three-fourths of the entire post-1947 decline occurred between 2000 and 2016 (Exhibit 1). The steepest part of the decline\u0026mdash;from 63.3 percent in 2000 to 56.7 percent in 2016\u0026mdash;followed a moderate downward drift in the 1980s and early 1990s, and a slight recovery in the late 1990s.\u003c/p\u003e\n[[Exhibit 1]]\n\u003cp\u003eWhile the decline of labor\u0026rsquo;s share of income influences workers\u0026rsquo; compensation, our analysis suggests that it is not the primary reason for the slow income growth and growing gap between median wages and labor productivity observed in the United States.\u003c/p\u003e\n\u003cp\u003eTo better understand the phenomenon, we break down \u003ca href=\"http://www.oecd.org/eco/decoupling-of-wages-from-productivity/\"\u003ethe gap between historical productivity growth and median wage growth\u003c/a\u003e. We estimate that declines in the labor share of income explain 18 percent of the gap between median wages and historic productivity growth rates. Weak productivity growth was the most influential factor, accounting for half of the gap. The disproportionate distribution of income gains to highly paid workers, reflected in a growing gap between average and median wages, accounts for 19 percent of the gap, a similar contribution to the labor share. The growing wedge between prices of consumption and production accounts for roughly 9 percent of the gap.\u003c/p\u003e\n\u003cp\u003eNonetheless, the decline in labor share remains a sizable factor for income. As an illustration, had it remained at the levels of 1998, all else being equal, average worker pay might be higher in real terms by roughly $3,000 per year today.\u003c/p\u003e\n[[SectionHeader 2]]\n\u003cp\u003eTwelve sectors that make up about one-third of employment and 44 percent of economic output explain the overall decline in labor share or increase in capital share. These sectors represent a broad and diverse set of economic activities. They are: mining and quarrying; construction; real estate; coke and refined petroleum; motor vehicles; pharmaceuticals and chemicals; computer, electronics, and optical products; publishing, audiovisual, and telecom; computer programming and consulting; information services; wholesale and retail, and transportation and storage (Exhibit 2).\u003c/p\u003e\n[[Exhibit 2]]\n\u003cp\u003eThese sectors are, on average, more globalized, more digitized, and more capital-intensive than the overall economy\u0026mdash;but there are many exceptions, including labor-intensive sectors such as construction and retail.\u003c/p\u003e\n\u003cp\u003eNotably, eight of the 12 sectors experienced faster-than-average wage growth, in most cases supported by above-average productivity growth. Almost all of these sectors have experienced a decline in labor share of more than five percentage points between 1998 to 2002 and 2012 to 2016. The rising economic size of sectors with low labor share, such as real estate, also played a role.\u003c/p\u003e\n\u003cp\u003eThe academic literature has put forward a range of reasons for the decline in labor\u0026rsquo;s share of income but it diverges on which factors and mechanisms matter most. For our analysis, we cluster the main drivers into the following five broad categories:\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eCapital deepening, substitution, and automation.\u003c/strong\u003e\u003c/em\u003e Improvements in technology, such as more powerful computers and industrial robots, are reflected in lower prices for investment goods; this increases the incentive to substitute capital for labor, perhaps enough to make automation and the displacement of labor economical in the first place. If labor plays less of a role in production, for example through lower employment, its share of income can decline.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003e\u0026ldquo;Superstar\u0026rdquo; effects and consolidation.\u003c/strong\u003e\u003c/em\u003e Recent research has shown that \u003ca href=\"/featured-insights/innovation-and-growth/superstars-the-dynamics-of-firms-sectors-and-cities-leading-the-global-economy\"\u003esuperstar firms\u003c/a\u003e\u0026nbsp;are reaping rising shares of profits and value added. This is particularly the case in knowledge-intensive sectors, so that more value goes to capital owners relative to labor. Such consolidation and rise of superstars can also go together with lack of competition, particularly in highly regulated sectors or in domains where intellectual property gives companies a competitive edge, for example due to strong patents.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eGlobalization and labor bargaining power.\u003c/strong\u003e\u003c/em\u003e Increased trade competition from imports made in lower-cost countries and the threat of \u003ca href=\"https://www.brookings.edu/bpea-articles/the-decline-of-the-u-s-labor-share/\"\u003eoffshoring\u003c/a\u003e (exporting jobs to such countries) can put pressure on wages and employment. In some sectors, the erosion of labor market institutions such as unions weakens the bargaining power of workers as well.\u003c/p\u003e\n[[PullQuote 2]]\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eHigher depreciation, including due to a shift to more intangible capital.\u003c/strong\u003e\u003c/em\u003e Production processes in recent decades have undergone changes, particularly toward a greater use of capital for assets in the form of \u003ca href=\"https://ideas.repec.org/p/bge/wpaper/927.html\"\u003eintangibles and intellectual property products (IPP)\u003c/a\u003e, such as patents, R\u0026amp;D, and software, which have faster depreciation cycles than buildings and machines. Furthermore, the economy is working through a capital overhang\u0026mdash;an increase in capital-to-output ratios\u0026mdash;that stems from the investment boom before the financial crisis and the output collapse that followed. Both of these factors increase the depreciation share of income, which reduces the amount available to either labor or capital, in net terms.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSupercycles and boom-bust.\u003c/strong\u003e\u003c/em\u003e \u003ca href=\"/capabilities/sustainability/our-insights/how-technology-is-reshaping-supply-and-demand-for-natural-resources\"\u003eRapidly rising commodity prices\u003c/a\u003e\u0026nbsp;in the energy and minerals sector tend to increase profits (and investment) and reduce labor\u0026rsquo;s share of income. Other sectors such as real estate and construction have exhibited pronounced boom-bust sequences that also led to shifts in capital\u0026mdash;and hence labor\u0026mdash;share of income.\u003c/p\u003e\n[[SectionHeader 3]]\n\u003cp\u003eFor our analysis, we identify which industries have contributed most to the increase in capital share, quantifying a \u0026ldquo;mix\u0026rdquo; effect (the importance of each sector in terms of relative value added) and a \u0026ldquo;within\u0026rdquo; effect (the rise of capital share within an industry).\u003c/p\u003e\n\u003cp\u003eSecond, we investigate which fraction of gross operating surplus is an actual increase in net profits and which fraction is attributed to depreciation. We can use the calculated increase in depreciation directly to assess that effect and understand from sector deep dives the factors that drove it.\u003c/p\u003e\n\u003cp\u003eThird, to help us distinguish between rising returns versus capital deepening, we adapt a DuPont decomposition typically used in finance to further break down net operating surplus into its underlying components, notably returns on invested capital vs. capital to output ratios.\u003c/p\u003e\n\u003cp\u003eFinally, we use a micro sector lens to understand the dynamics across and within sectors, combining the above analysis with additional sector data and industry expertise.\u003c/p\u003e\n\u003cp\u003eWe use those insights to map sectors to the five leading explanations for the decrease in labor share identified above. For each sector and each of the five explanations, we conduct a simple assessment to designate them as \u0026ldquo;limited,\u0026rdquo; \u0026ldquo;relevant,\u0026rdquo; or \u0026ldquo;highly relevant\u0026rdquo; and use that to allocate the sector\u0026rsquo;s contribution to the overall labor share decline to those explanations.\u003c/p\u003e\n\u003cp\u003eWhile our decompositions are mathematically precise, the relevance we assign to each driver in each sector is based on informed judgements and our knowledge of the respective industry.\u003c/p\u003e\n\u003cp\u003eWe find that that the main drivers for the decline in the labor share of income since 1999 are as follows, starting with the most important (Exhibit 3):\u003c/p\u003e\n\u003cul\u003e\n \u003cli\u003eSupercycles and boom-bust (33 percent)\u003c/li\u003e\n \u003cli\u003eRising depreciation and shift to IPP capital (26 percent)\u003c/li\u003e\n \u003cli\u003eSuperstar effects and consolidation (18 percent)\u003c/li\u003e\n \u003cli\u003eCapital substitution and technology (12 percent)\u003c/li\u003e\n \u003cli\u003eGlobalization and labor bargaining power (11 percent)\u003c/li\u003e\n\u003c/ul\u003e\n[[Exhibit 3]]\n\u003cp\u003eWe estimate that \u003cem\u003esupercycles and boom-bust effects\u003c/em\u003e\u0026mdash;particularly in extractive industries and real estate\u0026mdash;account for one-third of the surge in gross capital share since the turn of the millennium, even after depreciation. In two sectors, mining and quarrying and coke and refined petroleum, capital share increases were led by increased returns on invested capital and higher profit margins during a sharp and prolonged rise in prices of metals, fuels, and other commodities fed by China\u0026rsquo;s economic expansion in the 2000s. Technological advances then buffered some of the impact of the later decline in oil prices on profitability. Energy prices and cycles have affected other sectors, but to a lesser extent. This includes firms in the transportation and storage sector, such as truckers, shippers, and airlines, where profits are correlated with economic cycles.\u003c/p\u003e\n\u003cp\u003eHousing-related industries also contributed. The capital-intensive real estate sector grew in importance in terms of gross value added during the bubble.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003eRising and faster depreciation\u003c/em\u003e is the second-largest contributor to the increase in gross capital share, accounting for roughly one-fourth (26 percent) of the total. Depreciation matters for labor share analyses, because the baseline, GDP, is a \u0026ldquo;gross\u0026rdquo; metric before depreciation; if more capital is consumed during the production process, there is less net margin to be distributed to labor or capital. This fact receives little attention in the literature. One reason depreciation has become such a large factor in driving up the capital share is the increase in the share of intellectual property products in investment\u0026mdash;software, databases, and research and development\u0026mdash;which depreciates faster than traditional capital investments such as machinery and equipment or buildings. The increase has been substantial: the share of IPP capital rose from 5.5 percent of total net capital stock for the total economy in 1998 to 7.3 percent in 2016, an increase of almost 33 percent.\u003c/p\u003e\n[[StatementDisruptor 1]]\n\u003cp\u003eAnother factor driving higher depreciation is a \u0026ldquo;capital overhang\u0026rdquo; from the investment boom and ensuing output bust. Slightly elevated capital-to-output ratios (net capital stock over value added) mean that there is also, in historic terms, more capital relative to output that depreciates and therefore higher depreciation shares of output.\u003c/p\u003e\n\u003cp\u003eWe estimate that \u003cem\u003esuperstar effects\u003c/em\u003e\u0026nbsp;\u003cem\u003eand consolidation\u003c/em\u003e collectively contribute about one-fifth of the capital share increase. We base this estimate on analyzing which industries actually saw an increase in ROIC as a direct driver of capital share increases and where the increase goes hand-in-hand with (and may partially result from) rising consolidation or rise of superstar firms. Such patterns seemed particularly pronounced in several industries, and for each of them, superstar effects were marked as a \u0026ldquo;highly relevant\u0026rdquo; or \u0026ldquo;relevant\u0026rdquo; driver. Telecommunications, media and broadcasting, for instance, experienced significant rises in returns. The transportation and storage industry went through another round of airline consolidation and recovered from the crisis to ROIC levels that are high by historic standards. The pharmaceutical and chemicals as well as information and computer services sectors are also known for superstar effects. Finally, wholesale and retail as well as refining also went through a spurt in returns and consolidation.\u003c/p\u003e\n[[PullQuote 3]]\n\u003cp\u003eThe fourth-most-important factor driving the increase in capital share of income appears to relate to a \u003cem\u003esubstitution of capital for labor\u003c/em\u003e through factors including decreasing technology prices and better capabilities of machines. We estimate that this effect accounts for 12 percent of the increase in capital share in the industries we analyzed. For this estimate, we note this driver as \u0026ldquo;relevant\u0026rdquo; or \u0026ldquo;highly relevant\u0026rdquo; for those industries that experienced a notable increase in capital-to-output ratios (as a direct driver of capital share increases), and where industry interviews suggest that such increases are partially driven by investment, including in technology. This pattern seemed most pronounced in computer and electronics and motor vehicles (automation of production), pharmaceuticals and chemicals (drug manufacturing), information services (investment in data processing and stocking facilities), and, to a lesser extent, wholesale and retail trade (digitization of sales channels and supply chains) as well as mining and quarrying (rapid productivity improvements in shale oil and gas extraction).\u003c/p\u003e\n\u003cp\u003eOne of the most discussed reasons for labor\u0026rsquo;s declining share of income\u0026mdash;the weakening of labor bargaining power under pressure from \u003cem\u003eglobalization\u003c/em\u003e\u0026mdash;is, in our analysis, not as important as other factors for the total economy in the time frame we focus on. It explains 11 percent of the overall decline. To arrive at this estimate, we mark this effect as \u0026ldquo;relevant\u0026rdquo; or \u0026ldquo;highly relevant\u0026rdquo; in sectors that saw profit margin increases (for example through pressure on costs and exit of less competitive firms) or capital-output ratio increases alongside comparatively weak employment, low wage growth, or a rapid decline in the rate of employees covered by union contracts. We then corroborated these indicators with industry interviews. Globalization and labor bargaining power did have a very large and visible impact in a few of our selected sectors, including automobile manufacturing, where declining union coverage and falling wages as production shifted to the southern United States and Mexico increased the capital share. However, the overall economy effect is limited due to the relatively small size of this industry (approximately 2 percent of the total increase in capital share of income is related to motor vehicles). To a lesser extent, the computer and electronics sector, which contributed 9 percent to the total increase in capital share, was also affected by growing globalization of supply chains and offshoring, although other factors played an important role for this sector.\u003c/p\u003e\n[[SectionHeader 4]]\n\u003cp\u003eLooking ahead, our analysis might suggest that the labor share decline could be dampened but continue. According to the most recent BLS data, the labor share was relatively stable in 2017\u0026ndash;18. Looking at the five drivers in the past and their potential trajectory ahead, commodity cycle effects should taper off or reverse; energy prices have recovered since 2017 but are still well below their 2011\u0026ndash;14 peak, although technological advances in shale oil and gas may sustain profitability in the sector. \u003ca href=\"/featured-insights/innovation-and-growth/globalization-in-transition-the-future-of-trade-and-value-chains\"\u003eGlobal value chains are shifting\u003c/a\u003e, so that offshoring for labor cost arbitrage has decreasing importance.\u003c/p\u003e\n\u003cp\u003eThe ongoing shift to intangibles will likely continue to raise depreciation, however. Superstar effects as well as consolidation could also continue, although policy changes or hypercompetition might alter the trajectory. Capital substitution and technology deployment look set to continue or even accelerate, with significant uncertainty around the elasticities of substitution between capital and labor and the respective impact on the labor share. Our research suggests that this has not been a pronounced factor in the past, however.\u003c/p\u003e\n\u003cp\u003eIn regard to sector mix effects, forecasts of gross operating surplus and value added until 2030 suggest that the labor share may benefit from a shifting economic structure toward sectors that currently display a higher labor share, such as healthcare and social work activities, and a moderate downward adjustment in economic weight of some sectors with a typically low labor share, such as real estate and coke and refined petroleum.\u003c/p\u003e\n\u003cp\u003eThis analysis represents our preliminary perspective to help foster discussion and dialogue on the topic of declining labor share. We continue to research these issues and will adjust and refine our findings as we learn more. Nonetheless, our initial insights already raise some important potential research questions and policy implications.\u003c/p\u003e\n\u003cp\u003ePolicy makers may want to focus their attention on driving productivity growth to help address wage stagnation. Our research suggests that continued digitization and sustaining strong demand and investment will be critical, and that the \u003ca href=\"/featured-insights/regions-in-focus/solving-the-productivity-puzzle\"\u003ebenefits to productivity will likely outweigh any negative impact\u003c/a\u003e\u0026nbsp;on labor share from capital substitution if the past 20 years are a good indicator for what\u0026rsquo;s ahead.\u003c/p\u003e\n\u003cp\u003eLabor share declines have, in comparison, a smaller influence on wages. A large share of the decline is more technical than distributional (depreciation) and linked to a structural shift of investment toward intangibles. Another large share relates to supercycle and boom-bust effects, which are difficult to address in isolation. Actionable policies might have to focus on measuring superstar effects and ensuring a competitive environment across sectors. Policy makers may also need to mitigate the consequences of globalization where the changes in economic structure take place too rapidly for workers to adapt. They will need to ensure that technology works alongside human labor to make it more productive rather than substitute it; this would include retraining workers.\u003c/p\u003e\n[[DisruptorSignUp full-width]]"},"isFullScreenInteractive":{"boolValue":false},"hideStickySocialShareBar":{"boolValue":false},"desktopID":{"value":""},"mobileID":{"value":""},"desktopURL":{"value":""},"mobileURL":{"value":""},"desktopPaddingPercentage":{"value":""},"mobilePaddingPercentage":{"value":""},"desktopOverrideHeight":{"value":""},"mobileOverrideHeight":{"value":""},"cerosOembedURL":{"value":""},"cerosRenderMode":{"targetItem":null},"cerosBackgroundColor":{"targetItem":null},"hideByLine":{"boolValue":false},"tableOfContentsTitle":{"value":"TABLE OF CONTENTS"},"accessStatus":{"targetItem":{"key":{"value":"AllUsers"},"value":{"value":"All Users"}}},"articleType":{"targetItem":{"displayName":"Discussion Paper"}},"hasSpecialReport":{"boolValue":false},"contentType":{"targetItem":{"displayName":"Article"}},"sourcePublication":{"targetItem":{"name":"MGI Research","displayName":"MGI Research","title":{"value":"MGI Research"},"relatedlinks":{"url":"/mgi/overview"},"landinglinks":{"jsonValue":{"value":[]}}}},"externalPublication":{"value":""},"mobileReady":{"boolValue":true},"forClientsOnly":{"boolValue":false},"excludeFromClientLink":{"boolValue":false},"originalPublishDate":{"jsonValue":{"value":"2019-05-22T00:00:00Z"}},"footnotes":{"value":""},"contributoryPractice":{"targetItems":[]},"aboutTheAuthors":{"value":"\u003cp\u003e\u003cstrong\u003e\u003ca href=\"/our-people/james-manyika\"\u003eJames Manyika\u003c/a\u003e\u003c/strong\u003e is chairman and a director of the McKinsey Global Institute, where \u003cstrong\u003e\u003ca href=\"/our-people/jan-mischke\"\u003eJan Mischke\u003c/a\u003e\u003c/strong\u003e is a partner, \u003cstrong\u003e\u003ca href=\"/sitecore/service/notfound.aspx?item=web%3a%7b84678d1c-4492-40d5-b2f0-b1050a1429c7%7d%40en\"\u003eJacques Bughin\u003c/a\u003e\u003c/strong\u003e and \u003cstrong\u003e\u003ca href=\"/sitecore/service/notfound.aspx?item=web%3a%7b8d840caa-6a65-4626-8ce5-1f9fefe604dd%7d%40en\"\u003eLola Woetzel\u003c/a\u003e\u003c/strong\u003e are directors, and \u003cstrong\u003e\u003ca href=\"/our-people/mekala-krishnan\"\u003eMekala Krishnan\u003c/a\u003e\u003c/strong\u003e is a senior fellow. \u003cstrong\u003eSamuel Cudre\u003c/strong\u003e is a research specialist in McKinsey\u0026rsquo;s Wrocław office.\u003c/p\u003e"},"authors":{"targetItems":[{"template":{"id":"3FBABDB63A094F68B1F8E1BBE1BA124E","name":"Author"},"id":"4FD3F557E830420287A9709EF1357C32","name":"James Manyika","authorTitle":{"value":"James Manyika"},"description":{"value":""},"thumbnailImage":{"alt":"","src":null},"profile":{"targetItems":[{"standardImage":{"src":"/~/media/mckinsey/our people/james 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