Last month, Timothy Taylor, the Conversable Economist, posted an interesting item on the decline in labor's share of income. First some background.
I've taught economics since 1975, except for about 4 years (1979-1980 when I was a senior policy analyst at the Cato Institute, 1982-1984, when I was in the Reagan administration, first in the Labor Department and then at the Council of Economic Advisers, and 1990-91, when I went on leave without pay to put together The Fortune Encyclopedia of Economics. In most of the introductory courses I taught, I did a section on income distribution. One number I highlighted throughout this time was that the labor share of income in the United States was pretty much a historical constant, at about 62 or 63 percent. About 2 years ago, I decided I needed to update that section--and found that I was about 10 years out of date. Starting around 2001, the labor share of income began to decline. It's now about 10 percentage points below where it was, with labor getting only a little over half of income. And, as I understand it, it cannot be explained by the increasing share of labor income that is in the form of employee benefits: that's already taken account of in the data.
I highlighted that fact in a course last fall and told the students that although I'm no Marxist, I did find this a little concerning. I was actually gratified when some of the students fired back that why should I care if workers were getting higher real incomes than they were, which other data I had shown them demonstrated to be the case. You're right, I answered, but somehow I still find this concerning.
Then I read Tim Taylor's piece and became less concerned. Basically, he highlights an article by Roc Armenter, a vice president and economist at the Federal Reserve Bank of Philadelphia. (Taylor links to the article, but every time I click on the link I get a pdf file. So if you want the article, go to Tim's post.) I think that, although Tim mentions it, he goes too quickly past one of the main reasons for the decline, namely a change in measurement.
Indeed, until 2001, the BLS's [Bureau of Labor Statistics] methodology assigned most of proprietor's income to the labor share, a bit more than four-fifths of it. Since then, less than half of proprietor's income has been classified as labor income.
How important is this? Armenter shows a graph in which he keeps the BLS's pre-2001 methodology. With no change in methodology, labor's share falls, but only from about 62 or 63 percent to about 59 percent. This is still a substantial fall, but had I known this when I was teaching last fall, I would still have pointed it out, but would not have expressed nearly the concern I did.
Armenter, using other measures, goes on to show a substantial decline. He also claims that real wages have stagnated. I think he's wrong on this because real wages are usually computed using the CPI, which overstates inflation. Interestingly, Armenter labels his Figure 4, about labor productivity versus real wages in manufacturing, "Productivity Rose While Wage Growth Stalled." I don't know what "stalled" means. His figure shows that real wages grew more slowly and that they didn't grow as quickly as labor productivity. But real wages, even given Armenter's imperfect measure (and assuming his graph is accurate), grew.
Is all of this a puzzle? Yes, and that, to his credit, is how Armenter presents it. It's also how I will present it: not necessarily a concern, but definitely something for which economists don't have a clearcut explanation.