The labor share and structural change: insights from Baumol and Lewis

This paper investigates the interaction of structural change and the labor share. We use a series of thought experiments that combine theoretical assumptions underlying labor markets in Baumol and Lewis with the accounting of a sectoral decomposition of the labor share. The focus lies on a shift of employment from progressive to stagnant activities. To single out this shift, we construct simplified, hypothetical economies of Baumolian and Lewisian type. A thus sharpened Occam's
razor leads to clear and illustrative results: Baumolian structural change is inconsistent with the facts, whereas Lewisian outcomes conform to observed phenomena. A key issue in the relevant Lewisian scenario is that progressive activities take center stage. The details of our contribution are as follows. First, the sectoral decomposition shows that increasing stagnant sector employment shares coincides with downward decoupling in progressive activities, despite the fact that stagnant sector labor shares are higher. Second, we formulate cases based on the most consequential assumptions outlined in Baumol (1967) and Lewis (1954). Key results are that: (i) stagnant sector distribution dominates under Baumolian structural change; (ii) Lewisian structural change entertains the possibility of hysteresis; and (iii) decoupling of wages and productivity growth emerges only
in the Lewis classical model.