One of the most striking and troubling patterns in the US economy in recent decades is the \”declining labor share: that is, the pattern that the share of the value of output (in the nonfarm business sector) that goes to workers in the form of compensation, which includes benefits as well as wage and salary compensation, has been dropping. The labor share was typically in the range of 63-65% from the 1950s into the early 1970s. By the 1980s and 1990s, it was more often falling in the range of 61-63%. In the early 2000s, it fell below 60%, and since the end of the Great Recession in 2009 it has typically been between 56-58%.
This falling labor share is not some statistic recently created and promoted by partisan sources. It\’s calculated by the US Bureau of Labor Statistics, using a methodology that has remained more-or-less standard over the years. Two economists at the BLS, Michael D. Giandrea and Shawn A. Sprague, explain \”Estimating the Labor Share\” along with an overview of research findings on the issue in the February 2017 issue of the Monthly Labor Review.
As a starting point, here\’s their figure showing labor\’s share:
Giandrea and Sprague offer a nice concise overview of the main hypotheses for explaining the declining labor share. The theories include:
Cheaper investment goods, like computers, are leading firms to use more capital and less labor, which reduced the labor share.
For example, the authors write: \”Karabarbounis and Neiman examined data from more than 50 countries and argue that the decline in the relative price of investment goods—in particular, computerized capital—has led firms to employ more capital and relatively less labor. They find that this shift has been responsible for approximately one-half of the observed decline in the labor share.\”
The underlying assumptions about \”proprietor income\” are biasing the labor share calculations.
The calculation of labor share involve adding compensation received by employees to \”proprietor income,\” which is the labor income received by those who run their own business. However, proprietor income is conceptually tough to measure, because someone who owns their own business can receive both \”labor income,\” as if the person was an employee of their own business, and \”capital income,\” as the owner of the business. In the real world, these two types of payments are jumbled together. To address this issue, the Bureau of Labor Statistics has assumed that the hourly labor compensation of proprietors is the same as that of employees. However, if the labor income of proprietors is actually rising over time, then this assumption means that the labor share is understated. One study finds that about one-third of the observed decline in labor share is due to this assumption that the hourly labor compensation of proprietors is the same as that of employees, rather than using an alternative method that tries to estimate the capital income of proprietors directly.
Increased imports of labor-intensive goods.
A rise in imports of more labor-intensive goods means that production in the US economy will tend to be focused on less labor-intensive goods, which should tend to drive down the labor share. Teh authors cite work by Elsby, Hobijn, and Şahin concerning \”an increased reliance on imported inputs used in domestic production, especially inputs that have labor-intensive production processes. These `offshored\’ inputs are typically produced in countries with lower labor costs, resulting in an overall reduction in the price of domestically produced final goods.\”
Different industries have different labor shares, so shifts in which industries are larger or smaller can affect labor share.