The Labor Share Fell. So What? - Marginal REVOLUTION

Thank-you! You've been successfully added to the Marginal Revolution email subscription list.

The share of Gross Domestic Income accruing to labor has been declining in recent decades while the share accruing to capital has been rising. In the graph below, I show labor compensation as a share of GDI (left axis). Labor share has indeed been trending down–some of this could be an artifact of the data, e.g. an increase in proprietor’s income (labor) mislabeled as capital income, more pass throughs and so forth—but for the purposes of this post I will accept that the labor share has declined. What does this mean?

The natural response is to think that because the share going to labor has fallen and the share going to capital has risen that there has been a transfer of income from labor to capital. That is possible but it is not the only interpretation and it does not follow mechanically from the share data.

I have also plotted total compensation to labor (in real terms) in the graph above and far from shrinking it is higher than ever and growing. Moreover the right axis is logged so you can also see that outside of recessions the growth rate of labor compensation looks quite steady (similar slope over time). (Labor compensation per member of the labor force is noisier but looks similar).

The recessions in 2008 and 2020 are worth noting because these are periods when the labor share was high and locally at a maximum! The reason, of course, is that GDI was shrinking in these periods more than labor compensation. In other words, capital takes a bigger hit than labor in a recession. This is a good reminder that a high share of GDI is not what workers most care about–a high absolute level of GDI is more important for the bottom line.

In short, the data are consistent—not proof of, but consistent with—a story in which capital has become more productive, raising output. More productive capital also raises the demand for labor, so while more of the new output goes to capital in the first instance, the pie is growing and labor’s absolute compensation has grown with it. Yes, if the shares had stayed constant and output had grown just as much, labor compensation would have been higher still. And if my grandmother had wheels, she would have been a bicycle.

Marginal Revolution University

See Courses

Learn more about Mercatus Center Fellowships

Learn More

Subscribe via Email

Enter your email address to subscribe to updates.

Email Address

Subscribe

RSS Feed

Contact Us

Alex Tabarrok

Email Alex

Follow @atabarrok

Tyler Cowen

Email Tyler

Follow @tylercowen

Webmaster

Report an issue

Blogs We Like

Interesting People & Sites

Our Web Pages

Alex Tabarrok's Home Page

Alex's TED talk, how ideas trump crises

Conversations with Tyler

FDAReview.org

Tyler Cowen's Personal Web Page

Tyler's ethnic dining guide

Apply to Emergent Ventures

Books

Modern Principles of Economics

Tyler Cowen & Alexander Tabarrok