Who benefits from economic growth? This question is at the centre of today’s debates on inequality, automation, and the future of work. Across advanced economies, workers have been receiving a smaller share of national income, while profits have claimed a larger share. This shift has raised concerns that productivity gains are no longer translating into broad-based wage growth.

But the decline in labour’s share of income has not followed the same path everywhere. In new work (Bergholt et al. 2026), we show that Europe and the US experienced markedly different trajectories over the past four decades – and that the forces behind these developments were fundamentally different. In Europe, labour market reforms and demographic change were the main drivers. In the US, labour-saving technological change, especially automation, played the leading role.

A reversal in fortunes

The contrast between Europe and the US was first highlighted by Blanchard (1997), who documented a substantial decline in European labour shares during the 1980s while the US labour share remained broadly stable. Ironically, soon after, the pattern reversed. Europe experienced a sizeable decline in labour’s share between 1980 and 2000, but the trend largely stabilised thereafter. In the US, labour’s share drifted down gradually for several decades before falling much more sharply after 2000.

This divergence is not simply a difference in timing. It reflects distinct structural forces shaping how the gains from growth are distributed between workers and capital owners.

Why labour’s share matters

Labour’s share is more than a technical statistic. When workers receive a smaller portion of national income, wage growth lags behind productivity, household purchasing power weakens, and inequality tends to rise. Over time, this can undermine public support for technological progress, globalisation, and market-oriented reforms.

Understanding what drives labour’s share is therefore essential for designing policies that promote both growth and social cohesion. In the US, the rapid diffusion of automation and artificial intelligence has intensified worries that technological progress may increasingly substitute for labour rather than complement it, echoing the point raised by Restrepo and Acemoglu (2020) in their influential research on robots and jobs. In Europe, discussions have focused more on the role of labour market institutions, bargaining power, and demographic change in shaping wage dynamics and competitiveness, as emphasised by Schoefer (2025).

The broader decline in the labour share of income has also become a central theme in policy debates on inequality and market concentration. Karabarbounis and Neiman (2014) argued that the decline in the relative price of investment goods has been an important global force behind lower labour shares. More recently, Grossman and Oberfield (2022) reviewed the competing explanations for this phenomenon. In parallel, Gutierrez and Philippon (2023) documented that European markets have become more competitive than those in the US, casting doubt on the view that rising market power is a universal explanation for labour-share declines.

A new approach

To study these developments, we construct a panel structural vector autoregression with common trends using annual data for Germany, France, Italy, Spain, and separately for the US from 1960 to 2023. The model decomposes medium-run movements in output, wages, employment, and profits into four broad forces:

• Labour-saving technological change
• Labour market factors
• Capital-augmenting technological change
• Changes in market power

This framework allows us to identify which factors were most important for the evolution of labour’s share over time.

The data and the medium-run trend component of the variables are plotted in Figure 1. Table 1 panel A shows the percentage trend changes in the common labour share and the four forces we identify across sub-samples for Europe and the US. Our results reveal a striking transatlantic divide.

Figure 1 Macroeconomic and labour share trends in Europe and US

Europe: More jobs, lower labour share

In Europe, the labour share was essentially stable from 1960 to 1980. In the following two decades, it decreased by roughly 10% before stabilising after 2000. The dominant explanation is labour market changes, as shown in Table 1 (panel A).

We next introduce unemployment in our model to distinguish between wage bargaining and labour market institutions as separate labour supply factors that affect the labour share. Panel B of Table 1 demonstrates that strong unions and rigid labour markets supported wages in the 1970s. Subsequent reforms reduced the bargaining power of workers and increased labour supply through higher female participation, immigration, and pension reforms. These changes boosted employment but moderated wage growth, thereby reducing the labour share. 

Table 1 Percent change in trend labour share and different structural forces

Panel (A): Baseline

Panel (B): Extensions

US: Automation takes centre stage

The US followed a very different path. The labour share drifted down gradually for several decades but fell sharply after 2000. Our evidence indicates that automation is the principal driver of this decline. Using patent-based indicators of automation developed by Mann and Püttmann (2023) alongside trade measures, we distinguish automation from globalisation forces (Table 1, panel B). Both matter, but automation accounts for the bulk of the post-2000 fall in the US labour share. 

This pattern is consistent with growing evidence that robots and artificial intelligence increasingly substitute for labour in a wide range of tasks.

Employment trends reinforce the contrast

Employment trends reinforce this contrast. Since the mid-1980s, employment per capita has risen steadily in Europe (Figure 1), whereas US employment peaked around 2000 and subsequently declined (Figure 1, panel B), especially among prime-age men. As Birinci et al. (2026) note, this reversal represents one of the most important labour market developments of recent decades.

Europe created more jobs, but wage growth slowed. The US experienced stronger technological change, but employment and labour’s share weakened as automation accelerated.

Implications for policy

The main lesson is straightforward: technology does not determine distributional outcomes on its own. Institutions, demographics, and policy choices shape how the gains from growth are divided between labour and capital.

For Europe, the challenge is to preserve high employment and, at the same time, output growth while ensuring that productivity gains translate into wage growth. Policies that strengthen skills, support mobility, and maintain a balanced system of worker protections remain essential.

For the US, the central issue is adaptation to automation and artificial intelligence. Education, retraining, stronger competition policy, and tax systems that spread productivity gains more evenly can help ensure that technological progress benefits a wider share of workers.

Looking ahead

The rise of generative AI has brought renewed urgency to these questions. New technologies can transform production, but they do not determine who benefits. The contrasting experiences of Europe and the US show that policy choices will play a decisive role in shaping whether future growth is broadly shared.

References

Bergholt, D, F Furlanetto, N Maffei-Faccioli, and E Pappa (2026), “Understanding the transatlantic divide in labor income shares”, CEPR Discussion Paper DP21436.

Birinci, S, L Karabarbounis, and K See (2026), “Why do Americans no longer work so much more than non-Americans?”, CEPR Discussion Paper DP21343.

Blanchard, O (1997), “The medium run”, Brookings Papers on Economic Activity 2: 89–158.

Grossman, G, and E Oberfield (2022), “Trying to account for the decline in the labour share”, VoxEU.org, 13 January. 

Gutierrez, G, and T Philippon (2023), “How European markets became more competitive than US markets”, CEPR Discussion Paper DP12983. 

Karabarbounis, L and B Neiman (2014), “Labour shares, inequality, and the relative price of capital”, VoxEU.org, 25 November.

Mann, K, and L Püttmann (2023), “Automation patents and labour market outcomes”, Review of Economics and Statistics 105(3): 562–79.

Restrepo, P, and D Acemoglu (2020), “Robots and jobs: Evidence from US labour markets”, VoxEU.org, 10 April.

Schoefer, B (2025), “Eurosclerosis at 40: Labor market institutions, dynamism, and European competitiveness”, CEPR Discussion Paper DP20479.