Workers’ declining share of income
Senior fellow Jared Bernstein at the Center for Budget and Policy Priorities recently asked why capital is so much stronger than labor in our economy. Bernstein focuses on the effects of concentrated wealth on economic policy, but his question could be looked at in another way. The relative strength of capital in the economy can be measured as its share of income. The share of total income going to capital, instead of to workers, has been increasing since the 1980s. Understanding what’s driven this shift can tell us why capital has been flourishing compared to labor in recent decades.
The recent decline in the labor share of income is verified by any number of researchers—here’s a good summary of the trends in the data, though the exact size of the decline is up for debate. The potential causes of this shift are rapid advances in information technology, globalization, and the decline of labor market institutions such as unions. Three recent research papers examine all three of these trends and the consequences for workers’ share of income relative to capital.
The share of income going to capital may have increased because the price of capital goods has declined. This line of thinking rests on the idea that the information technology revolution of the past several decades has made technology much cheaper. As equipment becomes less expensive compared to workers, companies used capital more readily than labor—and thus the demand for labor declined. The result is a decreasing share of income going to labor. This is exactly the result found by economists Loukas Karabarbounis and Brent Neiman, both of the University of Chicago, who estimate about half of the decline is due to the lower price of investment goods.
The other potential culprit is globalization and the opening of the American economy to international markets. Economists Michael Elsy of the University of Edinburgh, Bart Hobikin of the San Francisco Federal Reserve Bank, and Aysegul Sahin of the New York Fed, find that the increasing offshoring is a “leading potential explanation” of the declining labor share of income. The researchers come to their conclusion by looking at the changes in the labor share within different U.S. industries. Labor shares within industries have been fluctuating for decades, but the present decline has been driven by the trade and manufacturing sectors. This fact would indicate that increased foreign competition is a large factor in the declining labor share.
The third potential cause is the weakening of labor market institutions such as unions. If the bargaining power of workers declines then they will have a harder time negotiating a higher share of income. Sociologist Tali Kristal of the University of Haifa looks at industry-level data on labor shares and finds that the decline in unionization, added by technological change, was the primary driver of the decline.
These papers argue for one or two specific factors being the primary cause of the decline, but these forces are hard to untangle. Capital goods may have become less expensive compared to labor due to information technology or it could be because globalization made labor cheaper. And increasing offshoring may have been due to the declining strength of organized labor.
Clearly economists have more to understand about this phenomenon. We may be moving from an era when inequality of labor income was largest source of inequality to an era where income inequality between labor and capital is the biggest driver. Hopefully the papers cited above are just the beginning of a new line of inquiry.