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In the United States, the labor share of national income has significantly declined since its peak in 1970. See the section 3-2 in the text for additional information. Offer your explanation for this trend. I suggest you frame your explanation in one of the following two ways: Option 1) using the conceptual theory in book, explain how/why factor prices for labor may have changed. Option 2) Explain why the conceptual theory in the book may be neglecting other important factors that determine the distribution of income. You do not need to write a comprehensive essay, a brief paragraph can be sufficient for full credit.

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Answer:

Two main factors can account for the reduction of the labor share of national income in the United States:

  • Declining real wages: real wages are the factor price of labor, and according to economic theory, real wages should be equal to the marginal productivity of labor. However, this has not hold true for the U.S. in recent decades, and real wages have consistently underpeformed in regards to labor productivity. This gap reduces the labor share of national income.
  • The rise of capital-intensive economic sectors and the decline of labor-intensive sectors: capital-intensive sectors such as finance and information technology have become more prominent in the economy, and labor-intensive sectors like agriculture and manufacturing have declined.

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