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


Smith, Matt, et al. “The Rise of Pass-Throughs and the Decline of the Labor Share”. American Economic Review: Insights, Accepted (Forthcoming). Print.
Manuscript.pdf955 KB
Prior_Version.pdf772 KB
Data.xlsx18 KB


We study the coevolution of the fall in the U.S. 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.

Last updated on 10/16/2021