Labor's Share of Income Measure
A Labor's Share of Income Measure is a ratio measure for a labor income measure relative to national income measure (often GDP).
- Context:
- It can range from being a Gross Labor Share to being a Net Labor Share.
- It can be increased by Labor-Augmenting Technology.
- It can be decreased by Capital-Augmenting Technology.
- It can be increased via Capital Controls (Harrison, 2005).
- It can be increase via Government Spending (Harrison, 2005).
- It has seen a decline in many Industrial Countries since 1980 (Guscina, 2007; Karabarbounis & Neiman, 2013).
- Example(s):
- Counter-Example(s):
- See: Mass Technological Unemployment.
References
2015
- (Eden & Gaggl, 2015) ⇒ Maya Eden, and Paul Gaggl. (2015). “On the Welfare Implications of Automation.” In: Social Science Research Network Journal. doi:10.2139/ssrn.2432313
- QUOTE: We establish that the rise in the income share of information and communication technology (ICT) capital accounts for half of the decline in the US labor income share.
- http://www.economist.com/news/briefing/21650086-salaries-rich-countries-are-stagnating-even-growth-returns-and-politicians-are-paying
- QUOTE: Part of the problem is that, even before the recession, wages had not been improving as straightforward economics might suggest — which is to say, in line with productivity. The two moved in tandem following the second world war (between 1947 and 1960 both rose by 51% in America) but have been drifting apart since the 1960s: since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%. Many other advanced economies have seen the same sort of trend. The result is that labour’s share of GDP has fallen. And of the share that goes to labour, more and more has been going to the people who earn the highest salaries, exacerbating the problem for the rest.
Scholars seeking to explain this decline in the labour share reckon a number of big forces are at work. One is that the income from capital — especially from housing — has been increasing more than the income from labour. Another is that, in many industries, capital goods have become a lot cheaper and/or better. Bosses can choose whether to spend money on machinery or people, and declines in the price of the kit required for a given amount of output — which can come about either because existing machines get cheaper or because new ones can do more — reduce demand for labour.
Globalisation can reduce the demand for rich-country labour, too. Michael Elsby of the University of Edinburgh and Bart Hobijn and Aysegul Sahin of the Federal Reserve have shown that in industries where imports became a more important part of the supply chain between 1993 and 2010 the labour share fell the most. And the decline of trade unions reduces labour’s bargaining power. The share of the American workforce unions represent has fallen in every decade since the 1960s, and similar declines have been seen across the G7 (see chart 1).
The new part of the puzzle — the bit that makes the lack of wage growth after the recession perplexing — concerns the other factor that, in the past, economists have seen as crucial in the setting of wages: unemployment. The usual assumption is that once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up. As firms outbid each other for talent, new workers get better starter salaries and valued staff secure juicy raises. Estimating the unemployment rate at which wage-driven inflation kicks in the NAIRU (non-accelerating inflation rate of unemployment) — is part of the core business of central banks.
- QUOTE: Part of the problem is that, even before the recession, wages had not been improving as straightforward economics might suggest — which is to say, in line with productivity. The two moved in tandem following the second world war (between 1947 and 1960 both rose by 51% in America) but have been drifting apart since the 1960s: since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%. Many other advanced economies have seen the same sort of trend. The result is that labour’s share of GDP has fallen. And of the share that goes to labour, more and more has been going to the people who earn the highest salaries, exacerbating the problem for the rest.
2014
- (Karabarbounis & Neiman, 2014) ⇒ Loukas Karabarbounis, and Brent Neiman. (2014). “Capital Depreciation and Labor Shares Around the World: Measurement and Implications."
- QUOTE: The labor share is typically measured as compensation to labor relative to gross value added (" gross labor share "), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share ") may be more important in some settings, however, because depreciation is not consumed.
2013
- (Karabarbounis & Neiman, 2013) ⇒ Loukas Karabarbounis, and Brent Neiman. (2013). “The Global Decline of the Labor Share." National Bureau of Economic Research, 129(1). doi:10.1093/qje/qjt032
2007
- (Guscina, 2007) ⇒ Anastasia Guscina. (2007). “Effects of Globalization on Labor's Share in National Income." (2007). IMF Working Paper No. 06/294
- QUOTE: The past two decades have seen a decline in labor's share of national income in several industrial countries. This paper analyzes the role of three factors in explaining movements in labor's share - factor-biased technological progress, openness to trade, and changes in employment protection - using a panel of 18 industrial countries over 1960-2000. Since most studies suggest that globalization and rapid technological progress (associated with accelerated information technology development) began in the mid-1980s, the sample is split in 1985 into preglobalization/pre-IT revolution and postglobalization/post-IT revolution eras. The results suggest that the decline in labor's share during the past few decades in the OECD member countries may have been largely an equilibrium, rather than a cyclical, phenomenon, as the distribution of national income between labor and capital adjusted to capital-augmenting technological progress and a more globalized world economy.
2005
- (Harrison, 2005) ⇒ Ann Harrison. (2005). “Has Globalization Eroded Labor’s Share? Some cross-country evidence." University of California, Berkeley, mimeo.
- In recent years, economists and other social scientists have devoted extensive research efforts to understanding the widening wage gap between high-skill and low-skill workers. This paper focuses on a slightly different question: how has globalization affected the relative share of income going to capital and labor? Using a panel of over one hundred countries, this paper analyses trends in labor shares and examines the relationship between shares and measures of globalization. Contrary to recent literature, the evidence suggests that labor shares are not constant over time. Over the 1960 to 2000 period, labor shares in poor countries fell, while shares in rich countries rose. These changes in labor shares are driven by changes in factor endowments and government spending, as well as by traditional measures of globalization, such as trade shares, exchange rate crises, movements in foreign investment, and capital controls. In particular, the results suggest that rising trade shares and exchange rate crises reduce labor’s share, while increasing capital intensity, capital controls and government spending increase labor’s share.
2003
- (Acemoglu, 2003) ⇒ Daron Acemoglu. (2003). “Labor‐and capital‐augmenting technical change.” In: Journal of the European Economic Association, 1(1).
- ABSTRACT: I analyze an economy in which firms can undertake both labor- and capital-augmenting technological improvements. In the long run, the economy resembles the standard growth model with purely labor-augmenting technical change, and the share of labor in GDP is constant. Along the transition path, however, there is capital-augmenting technical change and factor shares change. Tax policy and changes in labor supply or savings typically change factor shares in the short run, but have no or little effect on the long-run factor distribution of income. (JEL: O33, O14, O31, E25)
2002
- (Gollin, 2002) ⇒ Douglas Gollin. (2002). “Getting Income Shares Right.” In: Journal of political Economy, 110(2).
- ABSTRACT: Many widely used economic models implicitly assume that income shares should be identical across time and space. Although time‐series data from industrial countries appear consistent with this notion, cross‐section data generally appear to contradict the assumption. A commonly used calculation suggests that labor shares of national income vary from about .05 to about .80 in international cross‐section data. This paper suggests that the usual approach underestimates labor income in small firms. Several adjustments for calculating labor shares are identified and compared. They all yield labor shares for most countries in the range of .65–.80.
1999
- (Krueger, 1999) ⇒ Alan Krueger. (1999). “labor's share." American Economic Review, Papers and Proceedings, 89(2).
- ABSTRACT: This paper considers conceptual and practical issues that arise in measuring labor's share of national income. Most importantly: How are workers defined? How is compensation defined? The current definition of labor compensation used the Bureau of Economic Analysis (BEA) includes the salary of business owners and payments to retired workers in labor compensation. An alternative series to the BEA's standard series is presented. In addition, a simple method for decomposing labor compensation into a component due to raw labor' and a component due to human capital is presented. Raw labor's share of national income is estimated using Census and CPS data. The share of national income attributable to raw labor increased from 9.6 percent to 13 percent between 1939 and 1959, remained at 12-13 percent between 1959 and 1979, and fell to 5 percent by 1996.