Behind the Decline in Labor’s Share of Income
Margaret Jacobson and Filippo Occhino
Labor income, which includes wages, salaries, and benefits, has been declining as a share of total income earned in the U.S. Here, we look at the cyclical and long-run factors behind this development. Labor and capital both contribute to the production of goods and services in the economy, and each gets compensated with income in return. The share of total income accruing to labor, the labor income share, is a closely watched indicator because it can affect a wide range of other important macroeconomic variables, such as income distribution, human capital accumulation, the ...view middle of the document...
In the business sector, the gap between compensation per
hour and productivity—the wage-productivity gap—remained quite stable before 1980, began widening during the 1980s and 1990s, and opened up more visibly during the last decade.
Productivity growth in the nonfarm business sector averaged 2.7 percent before 1973, then 1.4 percent during the 1974-1995 slowdown, and 2.5 percent after the 1995 acceleration. Compensation per hour lagged behind productivity during the slowdown and more so during the acceleration, when it averaged 2 percent, almost half a percentage point less than productivity.
Economists have identified three long-term factors that can explain why the wage-productivity gap has widened and the share of income accruing to labor has declined. The first is the decrease in the bargaining power of labor, due to changing labor market policies and a decline of the more unionized sectors. Another factor is increased globalization and trade openness, with the resulting migration of relatively more labor-intensive sectors from advanced economies to emerging economies. As a consequence, the sectors remaining in the advanced economies are relatively less labor-intensive, and the average share of labor income is lower. The third factor is technological change connected with improvements in information and communication technologies, which has raised the marginal productivity and return to capital relative to labor. In addition to these long-run factors, some cyclical factors are...