Public enterprise and the rise and fall of labor share

Over the past seventy years developed economies have experienced a rise and a fall in labor share. We present a novel explanation to explain these observed trends -- public enterprise employment. First, we document an empirical link between labor share and public enterprise employment in a sample of fifteen developed nations in the post-war period. We then build a model that shows how public enterprise employment can increase labor share. It increases public enterprise labor share directly by overstaffing, which indirectly increases private sector labor share by reducing available labor. Finally, we show that the model's predictions are consistent with several reforms in which public enterprises were rapidly corporatized. The model successfully describes trends in labor share and inequality. Labor share immediately declines before recovering slightly and there is a one-off and permanent increase in wage inequality.