Economists use many tools to analyze a country’s economic growth and overall prosperity. You’ve probably heard of gross domestic product (GDP), or the total output of all labor and capital within the United States.  GDP is considered an imperfect measure – it excludes, for example, the value added to the economy by homemakers and stay-at-home parents since they don’t get paid for their services. Nonetheless, we often rely on GDP to tell us how well the U.S. economy is performing. But there are other tools as well. (See also: The GDP and Its Importance.)

Another Type of GDP

You may not have heard of a statistic called labor’s share of GDP, or the wage share of GDP. Labor’s share of GDP refers to the percentage of total output that goes to paying workers’ wages, salaries and benefits. In the United States, labor’s share of GDP held fairly steady from 1950, when it was 63.5%, through 1982, when it was 62.4%. And it spiked up to 65.9% in 1970. (The chart below tracks labor’s share of GDP over several decades.) 

 

 

But since then, labor’s share of GDP, a nonpartisan statistic calculated by the U.S. Bureau of Labor Statistics, has been declining. Throughout the 1980s and 1990s, it was in the 61% to 63% range. After spiking to 64.5% during the dot-com boom, it declined to 59.5% in 2010 and has hovered around 60% ever since. What’s more, the decline in labor’s share of GDP is a global trend, not just a U.S. one. 

The fact that labor’s share of GDP is declining does not mean that employment is declining. Think about it this way. Suppose the U.S. economy consists of two people: a capitalist (the owner of a company) and a laborer (the employee). Suppose that the capitalist owns a manufacturing plant and pays the worker to produce the product that it sells to another country or society. The company sell the product for $100. The capitalist pays the worker $80 for the labor and the capitalist gets $20 in profits. In this case, the percentage share going to labor is 80%.

Let’s suppose the laborer still works full time but only gets $70 for the work and the capitalist gets $30. The percentage share for the laborer declines to 30%. But the laborer is still working full time and hasn’t lost his job. The only difference is the percentage of total output that the laborer receives.

Of course, the size of the economy is not fixed. While labor’s share of GDP has declined, GDP itself has grown. GDP was $2,862.5 billion in 1980 (in current dollars); in 2016, it was $18,565.6 billion, according to the U.S. Bureau of Economic Analysis. Would you rather have 60% of $18,565.6 billion or 63% of $2,862.6 billion? GDP per capita has also grown. Back in 1990, it was about $36,000, and in 2015, it was close to $51,000. Both figures are in chained 2009 dollars. 

Possible Explanations for Labor’s Declining Share of GDP

Economists agree that there has been a decline in the U.S. labor share since the 1980s – and especially since the 2000s – but they don’t agree on the cause of the decline. Here are several hypotheses about why labor’s share of GDP has been declining. 

– Inexpensive foreign labor. The United States imports many labor-intensive goods since labor costs are often lower abroad. If the United States has been importing more labor-intensive goods, and if U.S. workers are therefore producing fewer labor-intensive goods, this could help to explain the fall in labor’s share of GDP.

– Anti-competitive lobbying by dominant firms. Regulatory barriers that keep out new competitors could cause certain sectors to become increasingly dominated by a few firms. Those firms will experience higher profits that benefit the cronies at the expense of the workers through rent-seeking

– Cheaper capital goods. Because capital goods like computers and machinery have become less expensive, firms are using more capital and less labor, and/or labor is becoming more productive thanks to its increasing ability to use capital goods like computers. Either way, labor’s share of GDP decreases. One academic study of 50 countries found that cheaper capital goods could explain about half of the decline in labor’s share of GDP.

– Superstar companies. A superstar or “winner take most” company is one that has a large share of its industry’s sales. In a 2017 working paper from the National Bureau of Economic Research by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen, the authors found that from 1982 to 2012, the four largest firms in each of six major economic sectors – manufacturing, retail trade, wholesale trade, services, finance and utilities and transportation – gained a larger share of sales in their sector than their smaller competitors did. The larger the share the top companies had, the more the size of labor’s share of GDP had declined. These firms’ efficiency or market dominance might mean that they don’t have to spend as much on labor to keep revenues rising. 

These superstar companies employ fewer people and so, as these companies add to the economy’s overall wealth, a smaller share of what they earn is going to labor. If you start a factory that employs 3,000 people and makes $1 million, more people get jobs than if you start a tech company that employs 300 people and makes the same $1 million. Further, while the tech company may pay much higher wages than the factory, it pays wages to one-tenth of the workers. The tech company produces fewer jobs and contributes less to labor’s share of GDP, and the owners end up with higher profits than the factory owners do.

Is Labor’s Declining Share of GDP a Problem?

Economists are concerned that the decline in labor’s share of GDP could be contributing to income inequality. When labor’s share of GDP is declining, it means that – while the U.S. economy is becoming more productive – average wages aren’t increasing commensurately.  More money goes to business owners, including corporate shareholders, and less money goes to workers. And workers may also be corporate shareholders – think workers who receive company stock as part of their compensation or workers who own shares of an S&P 500 mutual fund through their retirement plan. In fact, employee stock purchase plans are one reason why a much larger percentage of Americans owns stock today than did in the 1980s. Back then, about 14% of households owned stock. Today, just over half of Americans own stock. 

When labor’s share of GDP was holding steady in earlier decades, it meant that everyone was getting wealthier at similar rates as GDP increased. With labor’s share of GDP declining, capitalists may be getting wealthier at a faster rate than laborers. This discrepancy could have negative consequences if, for example, it leads to social and political unrest. Or it might not be a problem – does it matter if the top 1% can afford to own 15 luxury cars each as long as the other 99% experience a comfortable standard of living?

Some people have an economic belief that, over time, the rich get richer and the poor get poorer. They think the rich get richer at the poor’s expense; they see wealth as a zero-sum game, where there is only a finite amount to go around. Others say that a rising tide lifts all boats together: As the economic pie expands, there are more resources available for everyone. When companies, superstar or otherwise, do what is best for their bottom line, they also do what’s best for their workers and customers. Highly productive, efficient companies offer consumers better quality and/or lower cost, and they have the ability to innovate to continually improve things. Further, their success inspires competitors who can further contribute to innovation, job creation and economic growth.

The concern about labor’s falling share of GDP is that the economic pie is expanding and the increasing resources may only be going to the richest members of society, not to everyone.  (Read: A Brief History of Economic Inequality in the United States.) But it’s important to keep in mind that labor and capital – workers and business owners – are not inevitably opponents. They need each other. Not only are many workers also business owners but, without workers, business owners can’t profit; and, without business owners, workers can’t earn an income. This isn’t to say that workers never take advantage of business owners (how much time do you spend surfing the internet at work?) or that business owners never take advantage of workers (unpaid overtime and unsafe work environments come to mind). Even so, the two groups are ultimately interdependent.

Maybe Labor’s Share of GDP Isn’t Falling As Much As We Think

Another important theory is that the Bureau of Labor Statistics is overstating the drop in labor’s share of GDP. When an individual runs his or her own business, the BLS calls income earned from that business “proprietor income,” or self-employment income. This is a type of labor income. However, proprietor income is harder to measure accurately than wage and salary income that workers employed by others receive, as Timothy Taylor, managing editor of the American Economic Association’s “Journal of Economic Perspectives,” explains in a blog post. The reason: Business owners receive both labor income, as “employees” of their business, and capital income, as owners of their business. The BLS handles this complexity by assuming that proprietors earn the same hourly labor rate as employees. If its assumption is wrong, then the results are wrong, too. The labor share might be higher if proprietor income were calculated differently. 

The Bottom Line

Economists agree that labor’s share of GDP has been falling in recent decades, but they don’t agree on the cause. The latest theory is that superstar companies that dominate their industries and earn large revenues, but employ relatively few workers, could be contributing to the decline. Other theories include cheaper capital goods, anti-competitive lobbying by dominant firms, inexpensive labor and even flaws in the way labor’s share of GDP is calculated. A declining labor share of GDP might be a problem if it is contributing to increasing income inequality – and if increasing income inequality is indeed problematic.

 

 

 

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