Latent changes in the labour share

Abstract

The canonical model of automation introduced by Acemoglu and Restrepo in 2019 (Journal of Economic Perspectives, 33 (2), 3–30) unambiguously predicts a decline in the labour share within sectors. Decomposing changes in the US labour share into within-sector and between-sector components, they show that within-sector changes indeed account for the bulk of the recent decline in the US labour share, while overall between-sector changes are quantitatively unimportant. However, by extending their single-sector framework to a multi-sector model and rooting it in an empirically tractable decomposition, in this paper we show that the small overall between-sector component conceals substantial, though offsetting, equilibrium changes in consumer demand resulting from sector-specific changes in factor quantities and total factor productivity growth. Although these equilibrium forces have not affected overall between-sector changes in the US labour share so far, their importance indicates that ever-declining labour shares due to technological progress, such as artificial intelligence, are not inevitable in the future.