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I account for the sources of labor reallocation from the manufacturing sector towards services in the United States for the 1950 to 2010 period. I use a multi-sector model with sector-specific productivity growth and non-homothetic preferences to decompose the sources of labor reallocation into supply-side, demand-side, and wedge distortions. The decomposition is performed in the context of a competitive economy where the competitive equilibrium with wedges reproduces prices and quantities of the economy exactly. During the 1950–2010 period, the demand-side mechanism accounts for 57% of the reallocation of labor and the supply-side for 28%. Focusing only in the sub-period from 1950 to 1980, 70% of the reallocation is demand-driven. In the sub-period between 1980 and 2010, the three sources of labor reallocation are quantitatively important. Demand-side accounts for 47%, supply-side for 42% and wedge distortions for 10%.