The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains

The decrease in labor income share has gained worldwide publicity given that it may affect income inequality and other macroeconomic aggregates. This chapter focuses on global value chains (GVCs) as an important determinant of changes in the labor income share and indicates the mechanism responsible for the share decline under GVCs, which has not been documented in prior studies. The mechanism of developing countries is of particular research interest. In such countries, the services sector promotes capital deepening and increased involvement in GVCs because nonservices (especially manufacturing) tasks are offshored from developed to developing countries, creating demand for services as intermediate input to these tasks in the recipient developing countries. As a result, capital deepening is promoted in the services sector, and this results in lower labor income share. We conclude that the intersectoral production linkage between the services and nonservices sectors plays a major role in the downward trend of labor income share in developing countries