Labor’s share — the ‘stylized fact’ that isn’t a fact at all

14 Mar, 2019 at 16:49 | Posted in Economics | 2 Comments

jonvollrAccording to one of the most widely used textbooks on mainstream theories of economic growth, one can for the United States “calculate labor’s share of GDP by looking at wage and salary payments and compensation for the self-employed as a share of GDP. These calculations reveal that the labor share has been relatively constant over time, at a value of around 0.7.”

But is this “classic stylized fact” — that the labour share is relatively constant over time at around two-thirds — really true? One would, I guess, certainly have doubts after reading Piketty and taking part in the present discourses on economic inequality.

Sometimes a little data can do wonders. So let’s have a look at a couple of graphs that give us some:

fredgraph

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The relative share between labour and capital has obviously not remained relatively constant over time. The trend during the last five decades has been that labour’s share has declined. The workers’ slice of the pie has decreased.

Time to rewrite the textbooks? Hope so!

2 Comments

  1. While I don’t see how it is relevant, the authors use just the “wage and salary payments and compensation” only for the self-employed

  2. As major companies have consciously invested in building brands and devoted customers as the cornerstone of their business strategy, they have also shed their role as the direct employer of the people responsible for providing those products and services. In all of the above cases, the jobs shifted away to be done by separate employers pay low wages; provide limited or often no health care, pension, or other benefits; and offer tenuous job security. Moreover, workers in each case received pay or faced workplace conditions that violated one or more workplace laws. (Weil, David. The Fissured Workplace (pp. 2-3). Harvard University Press. Kindle Edition.)

    By shedding direct employment, lead business enterprises select from among multiple providers of those activities and services formerly done inside the organization, thereby substantially reducing costs and dispatching the many responsibilities connected to being the employer of record. Information and communication technologies have enabled this hidden transformation of work, since they allow lead companies to promulgate and enforce product and quality standards key to their business strategies, thereby maintaining the carefully created reputation of their goods and services and reaping price premiums from their loyal customer base.

    The new organization of the workplace also undermines the mechanisms that once led to the workforce sharing part of the value created by their large corporate employers. By shedding employment to other parties, lead companies change a wage-setting problem into a contracting decision. The result is stagnation of real wages for many of the jobs formerly done inside. (Weil, David. The Fissured Workplace (p. 4). Harvard University Press. Kindle Edition.)

    In essence, private strategies and public policies allow major companies to simultaneously profit from the core activities that create value in the eyes of customers and the capital markets and shed the actual production of goods and services. In so doing, they have their cake and eat it too. (Weil, David. The Fissured Workplace (pp. 4-6). Harvard University Press. Kindle Edition.)

    We have personally witnessed this. That is why the “self-employed” are even worse off than FT employees.


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