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Abstract
Acemoglu and Restrepo (2019)’s canonical model of automation unambiguously predicts a decline in the labor share within sectors. Decomposing changes in the US labor share into within-sector and between-sector components, they show that within-sector changes indeed account for the bulk of the recent decline in the US labor share, while overall between-sector changes are quantitatively unimportant. However, by extending their single-sector framework to a multi-sector model and rooting it in an empirically tractable decomposition, this paper shows that the small overall between-sector component conceals substantial, though offsetting, equilibrium changes in consumer demand resulting from sector-specific changes in factor quantities and TFP growth. Although these equilibrium forces have not impacted overall between-sector changes in the US labor share so far, their importance indicates that ever-declining labor shares due to technological progress, such as AI, are not inevitable in the future.
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