Labor’s declining shares

Posted: 8 June 2017 in Uncategorized
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labor shares

When I first began studying economics, the conventional wisdom was that “factor shares”—the shares of national income paid to labor and capital—were relatively constant.

So, there really was no need to worry about the problem of inequality. Poverty, maybe, but not the gap between wages and profits.

Now, of course, all of that has changed. Not only is there increasing recognition that the labor share changed, it’s been declining for more than four decades.

Even Stephen Cecchetti and Kim Schoenholtz, the authors of the textbook Money, Banking and Financial Markets, have acknowledged that

For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.

Thus, for example, the labor share of national income in the United States has fallen by about 12 percent from 1970 to 2014 (as indicated by the index scale on the left side of the chart above).

But, as it turns out, that’s only part of the story. The share of national income going to workers has declined by even more than that.

There are two main reasons why the “labor share” doesn’t give an accurate picture of the “workers’ share” of national income. First, as Michael D. Giandrea and Shawn A. Sprague explain, the labor share (as calculated by the Bureau of Labor Statistics) includes both employee compensation and the labor compensation of proprietors (and thus a portion, minus the capital share, of the income going to proprietors). Second, the labor share does not account for inequality between the different groups who receive what is officially measured as labor compensation:

the compensation of a highly paid CEO and a low-wage worker would both be included in the labor share.

So, in order to get an accurate picture of workers’ share of national income, we need to turn to other data.

What I’ve done in the chart above is measure (on the right side of the chart) the shares of income going to the bottom 90 percent and the bottom 50 percent of Americans. And, not surprisingly, the declines are even more dramatic: 20 percent for the bottom 90 percent (falling from 66 percent of total factor income in 1970 to 53 percent in 2014) and even more, 45.8 percent, for the bottom 50 percent (from 19 to 10.3 percent between 1970 and 2014). Those are the shares actual workers—not proprietors or CEOs—take home.

Finally, the conventional wisdom has begun to change. Under existing economic institutions, factor shares do in fact change—and they’ve been turning against labor for decades now.

The bottom line, though, is the situation of workers is even worse than what is indicated by the declining labor share. The workers’ share has fallen even more dramatically in recent decades.

It’s time, then, for the old models—the old theoretical models as well as the models for organizing the economy—to be thrown out and replaced in order to create an economy that actually works for American workers.

  1. […] I showed that conventional thinking about factor shares has been finally overturned: they are not […]

  2. […] as I explained back in 2017, the situation may be even worse for workers than the official numbers capture. […]

  3. […] as I explained back in 2017, the situation may be even worse for workers than the official numbers capture. […]

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