Behind the Decline in Labor’s Share of Income

02.03.2012

Economic Trends

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 composition of aggregate demand, and tax revenue. For decades, the labor income share has been fluctuating around a long-run value of approximately two-thirds. More recently, however, the share has been trending down. In the nonfarm business sector, which accounts for roughly 74 percent of the output produced in the U.S. economy, the share has decreased from values around 65 percent before 1980 to the current level of 57.6 percent. This decline has accelerated during the last decade. Excluding the financial sector, the labor income share was more stable up to the year 2000, but it has been trending down since.

It is interesting to look at this decline from a different angle. When the share of income accruing to labor declines, it means that labor income grows at a lower rate than total income. In other words, the compensation that workers receive in return for their labor grows at a lower rate than the output that they contributed to producing. Another way of saying this is that workers’ compensation per hour worked—the wage rate—grows at a lower rate than the output produced per hour worked—labor productivity. In short, when labor’s share of income declines, the wage rate grows less than labor productivity. In the business sector, the gap between compensation per

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