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Labor's falling share of the economic pie

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July 20, 2005

Labor's falling share of the economic pie

Michael Mandel

I've got a new article about the implication of the decline in labor's share of national income across the industrialized world. Take a look at it.

Here are the charts:

09:04 AM

Income Distribution

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It took us tight labor markets and an investment bubble to boost labor's share in the 90's. You don't want or expect that to reoccur do you? Still labor may be slightly tighter and business does seem to be more willing to spend. They do seem very concerned to keep labor competitive with that abroad though, such as cutting pensions.

Companies must do something with their profits eventually. Will we get a merge and acquistion frenzy? Dividend boosts? Another bull market? Price cutting to compete has been suspiciously absent other than autos.

Posted by: Lord at July 20, 2005 03:08 PM

This is a misleading story.

Salaries in the US are rising dramatically (about 4% over the past year), and the hypothesis that globalization harms wages is belied by the fact that Japan, which is relatively untouched by Bangalore, has a lower percent of GDP to labor.

In fact, you would expect the opposite; because globalization increases productivity, we become richer (ie US workers move from factory jobs to nursing or carpentry). As we become richer, our salaries have been rising. As salaries rise, it makes sense to augment expensive labor with cheap capital (ie computers, ATM's, driverless trains). As a result, the % of income not going to labor falls, since it is going to machines which make that labor more productive. So a lower % of income going to labor is actually the very reason salaries are rising at all.

This is unmitigated good news, a continuation of the 200-year industrial revolution, and the author should be celebrating that phenomenon, not scratching his head over fundamental growth processes he may recall from Macro 101.

Posted by: Peter St. Onge at July 23, 2005 07:48 AM

Where does Peter St. Onge get the information that salaries have risen about 4% over the past year? This doesn't tally with any data source I've seen. The best one I know of -- the Employment Cost Index -- shows compensation rising close to the rate of inflation, but even that is only because benefit costs have been rising quickly. Real wages are going down, even as profits go up.

Any attempt to explain the declining labor share ought somehow to explain the observation that interest rates are extremely low. So far, neither explanation seems to do that. Whether it's productivity or labor supply, either one would predict higher expected capital returns and therefore higher interest rates. I would suggest, if you want to explain the low interest rates, you need go for a Keynesian explanation -- underinvestment (= low animal spirits). Under this explanation, the world economy is running below potential, and the slack labor markets are causing wages to stagnate.

Posted by: knzn at August 17, 2005 04:44 PM

Peter, a belated rise to your comments after my vacation. Unfortunately salaries are not rising at 4%, after inflation is taken into account.

And why would you say that Japan is untouched? It's facing gale-force winds from China.

Posted by: MM at August 17, 2005 04:55 PM

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