Thread by @MartyManley

Thread on the decline of the labor share.

The American economy seems to divert a smaller fraction of its overall income to paychecks than it once did, although both the math and the meaning of this change is fraught.

1/16

For generations, the labor share was a mysterious and totemic constant, like the speed of light for a physicist.

About 2/3 of national income always went to wages. Nobody knew why. John Maynard Keynes declared the constant “a bit of a miracle.”

2/16

Figuring out whether or why it changed is not simple.

Depreciation, volatile housing and commodity prices, intangible assets, intellectual property, and pass-through and small business owners’ income all gum the math.

Worse, families eat their income, not their share.

3/16

Bob Solow got the question right: would you rather have higher real wages and a falling labor share or vice versa?

"The first is surely better on narrowly economic grounds. But there could be political and social advantages to the second option.”

4/

newrepublic.com/article/117429…

Most economists, the Federal Reserve Bank, and the White House have concluded that labor’s share of national income has actually declined.

@noahsmith offered a very useful summary of the debate

5/16

bloomberg.com/view/articles/…

Did the labor share really drop, and if so, why? There are several theories:

@rodrikdani cites a study that found that global trade made labor cheaper.

voxeu.org/article/econom…

6/16

Or maybe it made capital cheaper, so technology substituted for workers more easily.

7/16

nber.org/papers/w19136

Three groups of “denialists” argue that the labor share drop is an illusion.

They not necessarily wrong. Matt Rognlie found that exploding housing prices in certain cities made the capital share artificially high.

8/16

muse.jhu.edu/article/611902…

Others find that accounting for intellectual property explains the apparent growth of the capital share of income.

9/16

r-santaeulalia.net/pdfs/IPP-and-U…

A much older view holds that problems categorizing income for small business owners, which is sort of capital and sort of labor, has caused all the confusion.

10/16

taxfoundation.org/article/walkth…

A variation on this analysis focuses on pass-through income (mostly partners in professional firms). They find that classifying it as mostly labor income corrects for the apparent loss of the labor share.

11/16

ericzwick.com/capitalists/ca….

The McKinsey Global Institute (@McKinsey_MGI) analyzed the contribution of these factors. They found that increased profits from rapidly rising real estate and commodity prices (often from Chinese demand) explained about a third of the decrease in the labor share of income.

12/

-- depreciation and intangible IP explained another quarter
-- industry consolidation and reduced competition contributed about a fifth
-- automation, accounted for another 12%.

13/16

mckinsey.com/featured-insig….

For those who, like me, look for institutional answers: the decline of union contracts was found to be a small effect (11%) in part because so few private sector workers were unionized.

14/16

Recently, some of the biggest guns in economics, asked whether “superstar firms” contributed to the fall of the labor share.

They found support for 7 logical results consistent with industry concentration reducing the labor share.

15/16

scholar.harvard.edu/files/lkatz/fi…

The debate goes on. Some assert that the issue is merely class-struggle scorekeeping untethered from economic reality.

Others see a link to wage inequality. They note that wages for lower-paid workers no longer rise with the growth of output.

16/end

ocpp.org/media/uploads/…

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