Results for “the Labor Share” 286 found
The labor share is not in general falling
We study the joint impact of three measurement issues in the empirical literature on the labor share: (i) start and end periods for the empirical analysis; (ii) accounting for self-employment; and (iii) accounting for residential real estate income. When we correct for these three potential biases, we do not find a general decline in the labor share in our sample of advanced economies. In that respect the behavior of the US labor share after 2000 presents a puzzle.
That is from a new NBER Working Paper by Gilbert Cette, Lorraine Koehl, and Thoimas Philippon.
Has the Labor Share Declined? Maybe, maybe not.
In a 2017 post Asher Schechter correctly noted:
Of the various ills that currently plague the American economy, one that has economists particularly worried is the decline in the labor share—that is, the part of national income that’s allocated to wages.
Lots of theories have been proposed to explain the decline in labor share including automation, globalization and increased markups. In a big if true paper, Koh, Santaeulalia-Llopis and Zheng argue that all of these theories are wrong because there has been no decline in labor share once we take into account that the BEA changed how intellectual property was treated in the national accounts.
The lack of attention to measurement can severely misguide economic theory. We demonstrated that the change in the accounting treatment of IPP—from expensed to capitalized—gradually implemented by the BEA since 1999 is the sole driver of the decline of the accounting LS. Furthermore, our examination of the accounting assumptions behind the capitalization of IPP—mainly that all IPP investment rents are attributed to capital—indicates that less arbitrary and extreme assumptions on the factor distribution of IPP rents yield a trendless accounting LS. In other words, the LS decline is an artifact of the change in the accounting treatment of IPP in national accounts, and this is at odds with current macroeconomic theory that considers the accounting decline as an economic phenomenon at face value.
Labor share appears to have declined globally. Have most countries changed their accounting practices? Quite possibly, but more investigation is needed. Many of the theories are also quite plausible which perhaps explains the reluctance of theorists to give up on the “fact”. The Koh et al. paper has been circulating for a few years but most seem to brush it off. Autor, Dorn, Katz, Patterson and Van Reenen, for example, say:
Although there is controversy over the degree to which the fall in the labor share of GDP is due to measurement issues such as the treatment of capital depreciation (Bridgman, 2014), housing (Rognlie, 2015), self-employment and proprietor’s income (Elsby, Hobjin, and Sahin, 2013; Gollin, 2002) and intangible capital (Koh, Santaeulalia-Lopis and Zheng, 2016), there is a general consensus that the fall is real and significant.
Wait and see is probably rational at this stage. If the paper makes it through peer-review at the JPE, it will be more difficult to ignore.
It is arresting how many facts are in fact open to question. Maybe.
Hat tip: David Andalfatto somewhere on twitter.
The global decline of the labor share
That is the new paper by Loukas Karabarbounis and Brent Neiman, and the abstract is this:
The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has signi cantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced fi rms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing pro fits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.
In other words, capital-labor substitutability is very real. The full piece is here (pdf).
The decline in labor’s share of national income
That is the topic of my latest Bloomberg column, here is one excerpt:
There is some bad news afoot for workers. Labor’s share of the US gross domestic product has been falling for a long time, by seven percentage points since World War II. The labor share for 2022 — depending on exactly which measure is used, it comes in at slightly more than 60% — is the lowest measured since 1929.
And it’s not just America. Globally, the labor share, which is the fraction of an economy’s output that goes to workers, has declined by six percentage points since 1980. The numbers suggest that the share of labor is declining in 13 of the 16 wealthiest countries in the world.
Note that is a share, and very often real wages still are rising. Still, why this regularity?
One possible explanation for labor’s declining share is simply that the cost of capital has been falling for decades in most countries. That development benefits capital income very directly: It’s cheaper to raise capital, which benefits workers only indirectly. Of course, with real interest rates higher recently, it will be possible to test whether the labor share of income will make a comeback. In any case, this stands as one of the most plausible hypotheses.
Globalization and automation are two other trends that may have made labor markets more competitive, at least as compared to capital markets. Yet it is not obvious why those forces would lower labor returns more than capital returns. Is labor more mobile internationally than capital? Even if you think US companies have benefited from buying cheap manufactured goods from China and then reselling them at the expense of US workers, that doesn’t explain why labor’s declining share has been so widespread across countries and decades. If globalization were the culprit, labor’s share should be rising in China and other major exporting countries — but the opposite is true.
There is much more at the link. And I do recommend this Karabarbounis piece from the latest JEP on these topics.
Is concentration eroding labor’s share of national income?
Here is a new piece from Joe Kennedy, here are his summary points:
Despite the persistent claims that increased market power has hurt workers, the scholarly evidence is weak, while the macroeconomic data is strong and clear in showing that this is not the principal cause.
Labor’s share of income has declined slightly over the past two decades, but not principally because capital’s share of income has increased.
Most of the decline is offset by an increase in rental income—what renters pay and what the imputed rent homeowners pay for their house. This increase is due to restricted housing markets, not growing employer power in product or labor markets.
Antitrust policy is not causing the drop in labor share, so changing it is not the solution. For issues such as employer collusion over wages or excessive use of noncompete agreements, antitrust authorities already have power to act.
Stringent antitrust policy would do little to raise the labor share of income, but it could very well reduce investment and productivity growth. The better way to help workers is with pro-growth, pro-innovation policies that boost productivity.
This probable untruth received a big boost about three years ago, in part through mood affiliation. Perhaps other data will yet rescue it, but for now I am watching to see how long it will take to die away. Ten years perhaps?
Revisiting the Global Decline of the (Non-Housing) Labor Share
That is a new paper by Germán Gutiérrez and Sophie Pitony. I am on the road and have not had a chance to go through this, but the abstract is of interest:
We identify two undocumented measurement challenges affecting corporate sector labor shares outside the United States: the inclusion of dwellings and the inclusion of self-employed workers in the corresponding sectoral accounts. Both issues have become more important over time, biasing corporate labor shares downward. We propose two methods to correct for these challenges and obtain `true’ non-housing labor share series. Contrary to common wisdom, the corrected series exhibit stable labor shares across all major economies, except the US, where the corrected labor share declines by 6 percentage points since 1980.
For the pointer I thank Ilya Novak.
What Explains Labor’s Declining Share of Revenue in Major League Baseball?
Somehow I had missed this earlier paper by John Charles Bradbury:
Since the early-2000s, the share of revenue going to Major League Baseball players has been diminishing similar to the decline of labor’s share of revenue observed in the US economy. This study examines potential explanations for the decline in baseball, which may result from related factors and provide information relevant to explaining this macroeconomic trend. The results indicate that the value-added from non-player inputs, collective bargaining agreement terms, and related changes in the returns to winning contributed to the decline of players’ share of income. Competition from substitute foreign labor and physical capital are not associated with the decline in labor’s share of income in baseball.
There is also this sentence:
The decline in labor’s revenue share in MLB is consistent with changes in revenue share in the hospitality and leisure industry that experienced a decrease in labor’s share of income from 65.7 percent to 62.1 percent between 1987 and 2011 (Elsby, Hobijn, and Şahin 2013).
Another hypothesis I have heard is that baseball players are not nearly as good at, or as well-suited for, the use of social media, as compared say to the more visible basketball players. Another (quite speculative) claim is that sabermetrics has commoditized a lot of players and in turn lowered their bargaining power.
The Productivity Slowdown and the Declining Labor Share
That is the title of a new NBER paper from Gene M. Grossman, Elhanan Helpman, Ezra Oberfield, and Thomas Sampson. It is a very simple hypothesis, but they do show it can explain much of the observed decline in labor’s share:
We explore the possibility that a global productivity slowdown is responsible for the widespread decline in the labor share of national income. In a neoclassical growth model with endogenous human capital accumulation a la Ben Porath (1967) and capital-skill complementarity a la Grossman et al. (2017), the steady-state labor share is positively correlated with the rates of capital-augmenting and labor-augmenting technological progress. We calibrate the key parameters describing the balanced growth path to U.S. data for the early postwar period and find that a one percentage point slowdown in the growth rate of per capita income can account for between one half and all of the observed decline in the U.S. labor share.
In other words, the decreased bargaining power of labor, or for that matter globalization, are not necessarily playing major roles. Here is yet another (ungated) version of the paper.
Recent Declines in Labor’s Share of US Income
That is a new and important paper by Robert Z. Lawrence. It is a little hard to excerpt, but the core messages are pretty simple:
1. Labor and capital are mostly complements.
2. The recent problems of labor are due to a lack of capital, not substitution of capital for labor.
If Lawrence is right — and he has plenty of data on his side — a lot of what you read about these topics is wrong, at least circa the status quo. And the idea that we need stiffer taxes on capital income could be disastrously off base. This paper is interesting throughout, yet I predict it will be largely ignored for its inconvenient nature.
For the pointer I thank Robin Hanson.
The decline of the U.S. labor share of national income
That’s the new paper by Elsby, Jobijn, and Sahin, presented at Brookings earlier in the week. It’s less pathbreaking than some people are suggesting, but it is absolutely on the mark. The main finding of significance is that competition from cheap imports is a major source driving wage declines in the United States and shifting income toward owners of capital. The full abstract is here, with other points of note:
Over the past quarter century, labor’s share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession. Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor’s share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years.
As I reported two weeks ago, Autor, Dorn, and Hanson already found similar results.
There is an entire chapter in Average is Over suggesting that trade effects on U.S. wages, in the negative direction, are stronger than many economists think, through factor price arbitrage, and that the topic deserves further investigation. But it turns out my discussion did not go far enough in the direction of attributing observed wage changes to trade, and because of this paper, and because of Autor, Dorn, and Hanson, I hereby revise my views accordingly.
Please note of course that this trade is still output-expanding and welfare-improving by traditional criteria, at the global scale. It simply has within-nation distribution effects which not everyone likes, though global inequality falls.
Arnold Kling, Michael Mandel, and Rob Atkinson, among others, have been ahead of the consensus on this question.
Why mediocre gdp growth and a strong labor market?
That is the topic of my latest Blooomberg column. This exercise is speculative, but here is my tentative resolution:
Workers have been undergoing a serious crisis of morale since the pandemic — and they really are doing less. So businesses, in turn, have to hire more of them just to keep pace.
Does this hypothesis fit with these economic signals? With inflation still in the range of 5%, slow economic growth cannot be due to insufficient aggregate demand. More likely, it is due to supply-side and productivity considerations. The biggest natural disaster of the last half decade has been Covid, which damages not capital but labor — whether workers’ health or their morale…
Could part of the explanation be the broader adoption of the work-from-home option? I know there are studies that say WFH increases productivity, but even the author of one of the more widely cited papers says that more research is necessary and that a lot depends on how well the arrangement is organized. Meanwhile, America is experiencing a mental health crisis, arguably made worse by both Covid stress and the accompanying lockdowns.
The productivity question is even more puzzling. If worker productivity is low, why keep on hiring? The key may be to look not at total productivity, but at productivity per hour — and not per reported hour, but per hour actually worked.
I concede that there exists no measure of productivity per hour actually worked. (The official number, which is not doing great either, measures productivity per reported hour.) But if the average office worker only puts in say two to three hours a day — and it is not implausible — then there is a lot of slack in the worker’s day, especially if they are WFH.
So consider this thought experiment as a possible explanation: You are a manager and have noticed that new hires tend to be more enthusiastic and hard-working than current employees. Under this theory — and that’s all it is — you decide to hire more contract workers for well-defined, short-run tasks. Meanwhile, you redouble your efforts to bring workers back into the office.
Viewed through an economic lens, it is puzzling why there aren’t more gains from trade. That is, workers agree to put in more effort, and employers agree to pay them more. That is a trend which should be expected — but WFH makes monitoring difficult.
Note this same pattern of mediocre output growth and labor scarcity is evident in many other economies, including Germany and Czechia, as discussed in the column.
The supply side of the labor market was indeed a factor
It wasn’t just the demand side at fault, labor supply was misbehaving as well. Put aside the Twitter one-liners about video games, the evidence is now overwhelming, as I argue in my latest Bloomberg column. Here is one excerpt:
Fast forward to the pandemic and early 2021. It was the conventional wisdom that inflation would be very difficult to create, because demand is usually deficient and supply can respond to any surge in spending, thereby offsetting inflationary pressures. That was the consensus formed after the Great Recession, and it turned out to be spectacularly wrong. Now the US is living with its consequences, namely high inflation with a possible recession to follow.
The evidence is piling up that the US has been suffering from a deficit of human capital. For instance, a recent report showed that US life expectancy first stalled and then has been falling. In other words, current Americans — or at least some subset of them — are having trouble just staying alive.
And:
Another trend is that many people are marrying later in life, or not marrying at all, especially in the lower socioeconomic strata. That’s not necessarily bad. Still, an era characterized by fussiness in marriage may also be characterized by fussiness in choice of job. And marriage itself may be a spur for getting a job, especially for men. Again, individual choices — and not just insufficient demand — seem to have been a significant reason that labor markets were so slow to recover in the aftermath of the Great Recession.
It is also instructive to look at what is called “quiet quitting.” The US economy is close to full employment, in part due to an extreme overstimulation of demand. Even so, the human capital problems and labor market malfunctions haven’t gone away — they’ve just been pushed into other facets of the workplace experience. According to a recent Gallup poll, at least 50% of the US workforce are “quiet quitters.” Meanwhile, labor productivity is down dramatically, and though the measure is imprecise, it is hardly a good sign.
Many commentators are quite willing to entertain the hypothesis that there are significant problems with human capital in the US. But when discussion turns to the slow labor-market recovery following the Great Recession, all the blame is put on a weak monetary and fiscal response.
Recommended.
Covid-19 and female Indian labor force participation
Here are some new results of import:
The Covid-19 pandemic has created unprecedented disruptions in labour markets across the world including loss of employment and decline in incomes. Using panel data from India, we investigate the differential impact of the shock on labour market outcomes for male and female workers. We find that, conditional on being in the workforce prior to the pandemic, women were seven times more likely to lose work during the nationwide lockdown, and conditional on losing work, eleven times more likely to not return to work subsequently, compared to men. Using logit regressions on a sample stratified by gender, we find that daily wage and young workers, whether men or women, were more likely to face job loss. Education shielded male workers from job loss, whereas highly educated female workers were more vulnerable to job loss. Marriage had contrasting effects for men and women, with married women less likely to return to work and married men more likely to return to work. Religion and gender intersect to exacerbate the disproportionate impact, with Muslim women more likely to not return to work, unlike Muslim men for whom we find religion having no significant impact. Finally, for those workers who did return to work, we find that a large share of men in the workforce moved to self-employment or daily wage work, in agriculture, trade or construction. For women, on the other hand, there is limited movement into alternate employment arrangements or industries. This suggests that typical ‘fallback’ options for employment do not exist for women. During such a shock, women are forced to exit the workforce whereas men negotiate across industries and employment arrangements.
That is a recently published piece by Rosa Abraham, Amit Basole, and Surbhi Kesar. So often we have seen that what appear to be path-dependent effects occasioned by Covid are also predictors of the future longer-run equilibrium.
Via Sean Geraghty. And here is my previous post on the topic. And this is from Bloomberg:
Closing the employment gap between men and women — a whopping 58 percentage points — could expand India’s GDP by close to a third by 2050. That equates to nearly $6 trillion in constant US dollar terms, according to a recent analysis from Bloomberg Economics. Doing nothing threatens to derail the country on its quest to become a competitive producer for global markets. Though women in India represent 48% of the population, they contribute only around 17% of GDP compared to 40% in China.
All of this is worth a further ponder.
Labor Market Participation Rates and Male Incarceration Rates
In our textbook, Modern Principles, Tyler and I write
Another factor that may be important in explaining the decline in the labor force participation rate of less-skilled men is the rise in mass incarceration. The male incarceration rate in the United States increased from 200 per 100,000 in 1970 to nearly 1,000 per 100,000 at is peak in 2007, as shown in Figure 30.18. Incarceration doesn’t reduce the labor force participation rate directly because the rate is measured as the ratio of the labor force to the adult non-institutionalized population. But what happens to prisoners when they are released? It’s difficult to get a job with an arrest record let alone a prison record. In fact, due to occupational licensing, it’s illegal for ex-felons to work in many industries. Approximately 7% of prime-aged men have been incarcerated. Thus, the rising incarceration rates of the past could be causing some of today’s low labor force participation rates.
A recent paper provides some evidence: Felony history and change in U.S. Employment rates, estimates that “a 1 percentage point increase in the share of a state’s adult population with a felony history is associated with 0.3 percentage point increase in non-employment (being unemployed or not in the labor force) among those aged 18 to 54.”
The equitization of human labor, Fernando Tatis Jr. edition
Fernando Tatís Jr. was 18 years old, just a low-level prospect from the Dominican Republic trying to work his way up in the San Diego Padres farm system, when he made a financial deal that would impact his entire baseball career. And it wasn’t with the Padres.
Tatís signed a contract with Big League Advance, an unusual investment fund that pays minor-league players money up front in exchange for a share of their future MLB earnings.
Tatís, now 22 and widely viewed as one of the sport’s best young stars, today knows what those earnings will be. He agreed to a record-setting 14-year contract with the Padres on Wednesday night worth an eye-popping $340 million, the third-highest total in MLB history.
His new contract also creates a significant obligation for Tatís: to pay a sizable chunk of his new bounty—perhaps close to $30 million—to Big League Advance.
Here is the full WSJ piece, via Rick Pildes.