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The Rise of Pass-Throughs and the Decline of the Labor Share

  • Matthew Smith
  • Danny Yagan
  • Owen Zidar
  • Eric Zwick
American Economic Review: Insights
vol. 4, no. 3, September 2022
(pp. 323-40)
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Abstract

We study the coevolution of the fall in the US corporate-sector labor share and the rise of business activity in tax-preferred pass-throughs. We find that reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one-third of the decline in the corporate-sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, magnifying the role of the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares.

Citation

Smith, Matthew, Danny Yagan, Owen Zidar, and Eric Zwick. 2022. "The Rise of Pass-Throughs and the Decline of the Labor Share." American Economic Review: Insights, 4 (3): 323-40. DOI: 10.1257/aeri.20210268

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • E25 Aggregate Factor Income Distribution
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • K34 Tax Law
  • L60 Industry Studies: Manufacturing: General
  • L80 Industry Studies: Services: General