What drives labor share change? Evidence from Korean industries

Using aggregate- and industry-level data, this study shows the role of factor substitution and technological progress in labor share change in Korea over the past 30 years. Aggregate labor share shows a declining trend while masking the divergence in labor share at the industry level. The industry-level analysis provides evidence that in major capital-intensive industries with high substitutability between capital and labor such as electronics, an increase in the capital-to-labor ratio tends to be associated with a fall in the labor share. Given their rapid growth in value-added, these industries play a key role in the declining aggregate labor share. Service industries such as finance, with rapid labor-augmenting technological progress and low substitutability, have also contributed to the declining aggregate labor share.