Technological Changes, Offshoring, and the Labor Share

IMF Working Papers, July 2, 2019

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Existing studies on the downward trend in the labor share of income mostly focus on changes within individual countries.
The author documents that half of the global decline in the labor share of income can be traced to the relocation of activities between countries.
A two-country model is developed showing that when the relative price of investment goods falls, production activities with a small elasticity of substitution between capital and labor tend to get offshored from high- to low-wage countries.
The model explains why such relocation may drive the labor share down in both developed and developing economies, as well as globally.

Half of the global decline in the labor share of income is attributable to the relocation of activities between countries.
Falling relative price of investment goods is a mechanism inducing offshoring for activities with low capital-labor elasticity of substitution.
Offshoring of these activities can reduce the labor share in both origin (high-wage) and destination (low-wage) countries and at the global level.

Framework: two-country model capturing relocation of production activities.
Mechanism: when the relative price of investment goods falls, tasks/sectors with a small elasticity of substitution between capital and labor are prone to be offshored from high-wage to low-wage countries.
Implication: sectoral heterogeneity in capital-labor substitutability is central to understanding labor share declines linked to technological change and goods trade.

Subjects: Economic sectors, Financial institutions, Labor, Labor share, Manufacturing, Stocks, Wages
Keywords: capital-labor elasticity, cost of capital, elasticity of substitution, Global, goods trade, investment goods, labor cost share, Labor Share, Manufacturing, micro elasticity, Offshoring, offshoring proxy, Relative Cost of Capital, Stocks, Technological Changes, Wages, WP