Structural Change and the Labor Share: Insights From Baumol and Lewis

Abstract

This paper makes two contributions. First, it links a model of structural change and income distribution to a method of decomposing the aggregate labor share into sectoral contributions. Second, it formalizes the interaction between structural change and the labor share using Baumol (1967) and Lewis (1954). The premise is a shift of employment from progressive to stagnant sectors. We find that: stagnant sector labor share dominates distribution under Baumolian assumptions; and, only the Lewis model can deliver a decline in the aggregate labor share for an economy undergoing a reverse-Lewis structural change along the lines of Taylor and Ömer (2019).