The share of labor in national income is both over- and under-explained
TIT IDEA that the spoils of the modern economy are unfairly distributed has become part of the public discourse in the rich world. A common villain is the growing class of wealth owners living off the income of capital rather than hard-earned wages, an explanation popularized by Thomas Piketty in his book, “Capital in the Twenty-First Century,” published in 2013. L he idea has gained ground with politicians. And the study of the “labor share”, the part of the national income earned by workers through wages, has become a kind of cottage industry in economics.
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A new article by Gene Grossman and Ezra Oberfield of Princeton University explores Google Scholar and finds that more than 12,000 economic articles containing the words “labor share” and “decline” have been written in the past decade. Their review of the research suggests that economists’ understanding of why workers win a smaller slice of the pie is murky at best.
One of the reasons is measurement difficulties. Official statistics suggest that the labor share in the United States fell by about six to eight percentage points between the 1980s and the 2010s. But MM. Grossman and Oberfield list a number of recent articles which cast doubt on the numbers. A change in US tax law in 1986, for example, reduced taxes on partnerships and other pass-through corporations, which had the effect of distorting the measurement of wages. After the tax cut, many other business owners began to classify their businesses as mid-size companies and their profits as profits, which resulted in a decline in measured wages.
Another distortion comes from using gross national income to calculate the labor share, rather than a net measure that takes into account depreciation of assets. Using the net measure, which can better capture income available for consumption, suggests a smaller decline in the labor share. Indeed, the growth of assets such as computers has driven up depreciation rates and weighed on bottom lines and national income over time. This in turn increases the share of labor today.
MM. Grossman and Oberfield put forward another reason why the decline in the labor share is not well understood: the many explanations of economists are not consistent with each other. Researchers consider everything from automation to offshoring and increasing business concentration. They use sophisticated methods to estimate the role of a given factor, everything else being constant. But when the estimates are added up, the resulting number is too large. MM. Grossman and Oberfield estimate that the total could be as much as three or four times the amount of the actual decline in the labor share.
why is this the case? The authors argue that the researchers are proposing immediate causes of the decline, rather than root causes. Many of the allegedly separate factors may simply be different ways of labeling the same thing. Advances in information technology, for example, have made it possible to automate many office jobs, while strengthening the market power of some companies. Economists can tell a lot of stories, and those stories might even enter public discourse. But the truth remains elusive. ■
This article appeared in the Finance & Economics section of the print edition under the title “Pie in the sky”