The Race Between Preferences and Technology

Abstract

This paper argues that a unified analysis of consumption and production is required to understand the long‐run behavior of the U.S. labor share. First, using household data on the universe of consumer spending, I document that higher‐income households spend relatively more on labor‐intensive goods and services as a share of their total consumption. Interpreted as nonhomothetic preferences, this fact implies that economic growth increases the aggregate labor share through an income effect. Second, using disaggregated data on factor shares and capital intensities, I document that equipment‐intensive goods experienced relatively larger declines in their labor shares. Based on this finding, I estimate that capital and labor are gross substitutes, and that investment‐specific technical change reduces the labor share. Given the estimated elasticities, a parsimonious neoclassical model quantitatively matches the observed low‐frequency movements in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter.