Behind the Decline in Labor's Share of Income

Behind the Decline in Labor’s Share of Income

"Labor income, which includes wages, salaries, and benefits, has been declining as a share of total income earned in the U.S. Here, we look at the cyclical and long-run factors behind this development.

"Labor and capital both contribute to the production of goods and services in the economy, and each gets compensated with income in return. The share of total income accruing to labor, the labor income share, is a closely watched indicator because it can affect a wide range of other important macroeconomic variables, such as income distribution, human capital accumulation, the composition of aggregate demand, and tax revenue.

"...This decline has accelerated during the last decade. Excluding the financial sector, the labor income share was more stable up to the year 2000, but it has been trending down since."

"when labor’s share of income declines, the wage rate grows less than labor productivity. In the business sector, the gap between compensation per hour and productivity—the wage-productivity gap—remained quite stable before 1980, began widening during the 1980s and 1990s, and opened up more visibly during the last decade.

"Economists have identified three long-term factors that can explain why the wage-productivity gap has widened and the share of income accruing to labor has declined.

1.  "decrease in the bargaining power of labor, due to changing labor market policies and a decline of the more unionized sectors.

2.  "increased globalization and trade openness, with the resulting migration of relatively more labor-intensive sectors from advanced economies to emerging economies. As a consequence, the sectors remaining in the advanced economies are relatively less labor-intensive, and the average share of labor income is lower.

3.  "technological change connected with improvements in information and communication technologies, which has raised the marginal productivity and return to capital relative to labor.

~ Margaret Jacobson and Filippo Occhino