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.

Comments

If this paper in fact was real, labor share should have dropped suddenly in response to changes in accounting rather than gradually which is in response to market concentration. nice try but its not going to work.

I'm sure the authors didn't think of that

All data is provided by the interested subject itself.

La implantación del proceso de Coaching en la empresa.

Limpieza de cristales, suelos y pasillos.

Bienvenido a la Escuela de Escritura Creativa.

Pijama premamá y lactancia en suave tejido de algodón.

Cerrajeros profesionales de confianza en Madrid.

Journal of Endodontics 2017; 43:200-202.

Solicite precios reformas integrales Madrid baratas.

Mural de papel pintado Gigant Flora Light Blue.

You must select at least 1 quantity for this product.

Para mí nada simboliza mejor Marruecos. Te enamorará.

Es un resort que dispone de habitaciones por horas.

Vestido modelo Etnia de la Firma Tizzas.

Como hacen otros entrenadores personales.

Finalizada la instalación del césped synthetic.

Empresa jardineros de Madrid me recomiendan.

Flecos de papel para decorar los globos de 80-90cm.

Location , the hotel itself, roof prime pool and bar.

Ofertas de Hoteles Baratos en Torremolinos.

"the change in the accounting treatment of IPP—from expensed to capitalized—gradually implemented by the BEA since 1999..."

What's wrong with a slight drop in the labour share? I haven't seen a proper answer aside from muh workers.

The wage share drop occurred when the labor force participation rate increased and the drop was not slight, it was about 10%.

See deLoecker and Eeckhout's 2017 working paper. Plenty of treatment there for why it's a bad thing.

"What's wrong with a slight drop in the labour share?"

Why didn't you ask "what's wrong with lower gdp?"

Economies are zero sum.

BS. Total income is not a pie that is divided among people. It is the aggregate of earnings by different groups. Entrepreneurs and owners of capital can increase their earnings without depriving labor of a dime, and the labor share will fall.

In reality though, when capital and entrepreneurship become more productive, labor will benefit nonetheless. So they have a declining share of total income but absolutely more income.

Yeah, economies are zero sum.

A betrer way to state it using "pie", is the economy divides the pie among consumers, who are the workers making and baking pies. The more workers, and the better the process, like division of labor, the greater the number of pies divided among the workers.

Increasing pie output requires more workers building capital, like ovens, and other durable goods, which are consumed only over years and decades. Workers making pies divert a portion of their pie output to those workers, either through savings giving them ownership, or by rents to the workers who built the ovens, probably also the ones get the wood and firing up the ovens daily.

The constraint on the pie economy is land. More workers can increase production of pie, increase ovens producing pies, but no one can increase the land producing the trees to fire the ovens and producing the ingredients for the pies.

Of course, the US has lots of land taken out of production, turned into unproductive, yet high labor cost grass which must be dealt with by buying capital that is low productivity, ie, unused 99% of the time, used by labor of such low productivity they don't get paid.

But, "Entrepreneurs and owners of capital can increase their earnings without depriving labor of a dime, and the labor share will fall." is false, or just redefining workers as not workers.

Given land can't be increased, charging higher rents deprives workers of income/consumption, unless every dime of rent is paid to workers.

And the entrepreneur is merely a specialized worker.

Capital cant be created from nothing, so a capitalist is a worker who uses work to build durable goods which increase productivity of workers for a share of the output equal in value to the labor cost of building the capital before the capital is consumed.

Unless you define capitalist as a rent seeker that acts to block capital building to kill jobs and thus make workers worse off by denying them consumption by both cutting production and taking a big portion of production as debt from workers to the rent seeker.

"Capital gains" is free lunch economics of rent seeking. Kill jobs building capital to inflate the price of old capital above the labor cost of new capital. The inflated pricces backed by promises of work product decades in the future.

For example, circa 1980 is an inflection point in building transportation to increase the opportunity to build more capital, a reversal of US historical policy of building ever more transportation capital to make building new capital cheap. Building transportation harms rent seekers. No longer can rents from scarce land be extended to capital, by making capiital scarce.

Note, its ironic that AOC has adopted Trump's monetary policy, a policy of a rent seeker who wants looks of debt to fund rent seeking, and not paying workers. AOC has adopted the economics of the right, but picking different winners and losers. Just as Trump sees money printing as key to his rent seeking goals, AOC sees money printing as key to increasing the consumption of workers. Neither see economies as zero sum with consumption of workers equal to production of workers, thus the only way to increase gdp measured in dollars is by increasing average per capital labor costs and average living costs in lock step.

Tanstaafl, contrary to what conservatives have argued since the 70s.

Capital can be created or else we'd have a hard time explaining why the world's capital stocks are a very large multiple of what they were, say, 5000 years ago.

Too many variables. Just defining "labor share" is fraught. For example, are the very high salaries of corporate executives part of "labor share"? What about gains from stock options. Is that part of "labor share"? The accounting for intellectual property I would argue is a diversion. In today's information economy, IPP is the equivalent to yesterday's plant and equipment. Indeed, since tech companies often deflect a significant part of earnings to tax havens where the IPP is located in a file drawer, how does one even account for it? But I do agree that the focus on a declining "labor share" is also misplaced, in large part because labor today isn't like labor yesterday, not in an information or global economy like we have today. Has the "labor share" in China gone up or down in the past 40 years? Duh.

This inability to even agree on terms of measurement, let alone cause and effect, would argue for caution and modesty in suggesting/making significant economic and social policy changes.

If you can't define your terms in reliable and easily convertible units then the results are meaningless.

Same thing happens in modern physics with entanglement and Shrodinger effect, Heisenberg Uncertainty. This paper reminds me of the underrated "Dark Imports and Exports" paper of Ricardo Hausmann.

While labor share declines in America (maybe), Brazil's new anti-communist government is creating new, exciting opportunities for Americans in Brazil. Brazil has eliminated Visa requirements for Americans and is making easier for Americans to invest in Brazil. It's morning in Brazil again and you can enjoy the sun, too. For more information, contact Brazil's embassy and Brazil's Foreign Affairs Ministry.

I'm plum crazy!!!

That is an impersonator.

No it's not, it's really me, Andrew Washington, proud American from the great state of Minnesota, which is in the north central part of the United States. I am ashamed for my country when I see how our proud ally Brazil is ignored or insulted every day in the US. But president Bolsonaro will usher in a new era of cooperation in the AMericas.

One of the fundamental flaws in economics is that most of it is about abstractions. It is (or might be) possible to accurately estimate the mass of iron mined each year, but it is not possible to estimate its (absolute) value. Because it has none. It would be very difficult to work with Einstein's General Relativity without tensors. Tensors come in two varieties (simplified) contravariant and covariant. I've wondered for some time whether the BS sciences (behavioral & social) shouldn't adopt a similar math: there are some things which are clearly definable using absolute objective metrics but there are a lot of things which are only definable using standards which vary with time, location, and culture. BS'ers do an abominably poor job of keeping the two separate. It is really possible to compare "wages" of 1960 or 1990 to those of 2010 or 2020? Only if you assume it is.

As long as the richer are getting richer, wait and see has nothing to do with rationality or even evidence - at any stage, at least in the reliable commentary that marks this web site

___"It is arresting how many {economic} facts are in fact open to question... Maybe, maybe not."

OTOH ... what this country needs is a good one-armed economist

Is there any reason why, with totally automated factories and the like, the labour share of income cannot be exactly zero?

Exactly. In any event portraying a particular labour share is good and something lower, as bad, prima facia seems simply wrong to me. As Scott Sumner says, never reason from a price change. The labour share could fall because of more savings for instance, so increasing the capital base, which many people have been urging because "Americans don't save enough for retirement".

Alex asked if other countries also revised their accounting practices.

For the EU, the answer is yes: https://ec.europa.eu/eurostat/statistics-explained/index.php/Annual_national_accounts_-_how_ESA_2010_has_changed_the_main_GDP_aggregates#Impact_on_the_level_and_growth_rates_of_EA.E2.80.9118_and_EU.E2.80.9128_GDP

Key quote from the link: "Gross operating surplus and mixed income is by far the largest income component, contributing 3.2 percentage points of the total GDP revision in 2010 for the EU‑28 and 3.1 percentage points for the euro area. This is mainly due to the revised treatment of research and development and military weapons systems, which have been reclassified into capital expenditure."

“This is mainly due to the revised treatment of research and development and military weapons systems, which have been reclassified into capital expenditure."

So more spending on def, finally, but no desire to reveal this to their electorates?

If I hire a guy with a shovel he can do a days work. If I buy him a skidsteer to use, he now does 5x as much work, and it's a lot easier on him. Why does he deserve 5x the pay?

He doesn't 'deserve' more but since he is more productive he is certainly worth more to you. In a properly functioning labor market increased productivity would lead to higher wages, because either you pay him more or your competitor with a skidsteer will. Not 5x more but still.

More is fine, but not-5x leads to results like we've seen. If the ratio of capital and labor change it's only logical that payout to the same will change as well.

I predict you will pay your workers the market wage based on supply & demand.

If you pay less than the market wage, your workers will leave for a competitor, and you will have to pay more to hire them back.

If you pay more than the market wage, your competitor will out-compete you on price, and you will go out of business.

If you go to the BLS data on productivity you will find their estimate of labor's share going back to the 1950s.

This data shows that labor's share rising has been an almost perfect leading index of recessions. Maybe it is just a coincidence but this also is when inflation and interest rates rise.

Maybe the Fed does not want to see labor's share rising?

https://www.abc.net.au/news/2019-03-19/researchers-write-open-letter-on-benefits-of-faster-wage-growth/10912998?pfmredir=sm

"It is arresting how many facts are in fact open to question. Maybe."

In social science almost every purported "fact" is suspect because almost all social science "facts" are actually interpretations that rest on assumptions. These assumptions are at best hard to prove true; at worst they're unrecognized and their impacts are unknown as well.

If we look at a very long term picture, the labor share was 100% in Paleolithic and has gone down since then. So it is a good thing on the long run.

Comments for this post are closed