On Finance's Disparate Labor Share Dynamics: A Neoclassical Perspective

Labor’s income share experiences a much lower decline in finance than in the remainder of the market economy. We find that the neoclassical model of income distribution can explain these heterogeneous sectoral dynamics. Finance’s lower labor share decline is a reflection of its weaker net labor-augmenting productivity growth, as driven by unskilled labor. This counters the stronger skill-induced capital-labor synergies and capital intensity in the sector, which act to inflate the absolute size of labor share changes. Jointly, relative skilled labor supply, capital growth, and technical change channels generate relative skilled labor share changes that coincide exactly with the data.