Tumblr Icon RSS Icon

How To Explain The Declining Labor Share Of Compensation

By Matthew Yglesias on October 21, 2011 at 3:15 pm

"How To Explain The Declining Labor Share Of Compensation"

Share:

google plus icon

Peter Orszag has a column about the declining labor share of national income that concludes by saying that “We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.” Mike Konczal pushes back on this a bit noting some possible policy remedies. But one thing I wanted to push back on was that Konczal seems willing to agree with Orszag that “Labor share normally bounces around over the business cycle, but given how long the decline has lasted, it can’t be dismissed as cyclical.”

I don’t want to “dismiss” the trend as cyclical, but I think it actually is largely poor macroeconomic management. Let’s start where Konczal does with the labor share of non-farm businesses:

That looks like a long-term structural decline with a cyclical element. But suppose we restrict our attention to non-financial businesses. After all, what’s the difference between a “labor share” and a “capital share” of a financial enterprise? Mostly accounting and tax optimization, I would say:

Now the “long-term” decline is gone. You have long-term structural stability plus a cyclical element up until ten years ago. But the reality is that we’ve been in a continuous labor market recession for the past decade:

There’s nothing mysterious about the idea that the labor share of national income would fall when the labor market is weak. When the labor market is tight, workers are in a good position to bargain for wages. When the labor market is weak, employers are in a good position to demand givebacks or resist raise requests. Again, this doesn’t mean we should “dismiss” the issue as cyclical. It means that progressives need to step-up our level of concern for full employment defined as something like “an employment:population ratio of over 63 percent.” Not just a low unemployment rate, but a job market strong enough to induce employers to try to pull new people into the workforce. That’s the kind of labor market that supports a decent labor share of national income.

‹ PREVIOUS
Blame Stingy Spending, Not Unions, For Schools’ Short Hours

NEXT ›
Did The Obama Give A $529 Million Loan To Create Electric Car Manufacturing In Finland?

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.