Tuesday, February 6, 2018

Timothy Taylor — Behind the Declining Labor Share of Income

Total income earned can be divided into what is earned by labor in wages, salaries, and benefits, and what is earned by capital in profits and interest payments. The line between these categories can be a blurry: for example, should the income received by someone running their own business be counted as "labor" income received for their hours worked, or as "capital" income received from their ownership of the business, or some mixture of both?
However, the US Bureau of Labor Statistics has been doing this calculation for decades using a standardized methodology over time. The US labor share of income was in the range of 61-65% from the 1950s up through the 1990s. Indeed, for purposes of basic long-run economic models, the share was sometimes treated as a constant. But in the early 2000s, the labor share started dropping and fell to the historically low range of 56-58%. Loukas Karabarbounis and Brent Neiman provide some perspective on what has happened, citing a lot of the recent research. in "Trends in Factor Shares: Facts and Implications," appearing in the NBER Reporter (2017, Number 4)....
The fall in the labor share of income has consequences that ripple through the rest of the global economy. For example, it contributes to the rise in inequality….
When comparing current stock prices and price-earnings ratios to historical values, it's worth remembering when the capital share of income is higher, stock prices represent a different value proposition than they did several decades ago.
Conversable Economist
Behind the Declining Labor Share of Income
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

1 comment:

AXEC / E.K-H said...

Profit, income, and the Humpty Dumpty Fallacy
Comment on Timothy Taylor/Conversable Economist on ‘Behind the Declining Labor Share of Income’

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO idea what the pivot of their subject matter is.#1

Because profit is ill-defined, income/distribution is ill-defined, and this is due to the Humpty Dumpty Fallacy ― one of the worst idiocies of economics.

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumption goods industry, i.e. Qc≡C−Ywc, and the investment goods industry, i.e. Qi≡I−Ywi, that is, Q≡(C−Ywc)+(I−Ywi) or Q≡C+I−Yw (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Yw.

Now, Humpty Dumpty introduces a redundant definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Yw  and now (i) is rewritten
(b) Q+Yw ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit invisible.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic Profit Law is given as Q=Yd+(I−S)+(G−T)+(X−M) [1], Legend: Q macroeconomic profit, Yd distributed profit, I investment expenditure, S household sector saving, G government expenditures, T taxes, X exports, M imports. For the world economy as a whole X, M=0

The nominal labor share λ is defined as the quotient of wage income Yw and the sum of wage income and profit, that is, λ≡Yw/(Yw+Q) with Q given by [1] above.

Fact is that neither market power nor capital intensity nor information technology nor union weakness can ultimately account for a falling nominal labor share λ. The MAIN drivers of increasing macroeconomic profit Q have been in the past decades the increased DEFICIT SPENDING of the household- and the government sector. The other factors can only account for the distribution of profit Q between firms but NOT for the total amount.#2

Traditional distribution theory is worthless because the foundational economic concepts profit and income are ill-defined.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’

#2 Keynes, Lerner, MMT, Trump and exploding profit

#3 For details of the big picture see cross-references Profit