Germán Gutiérrez and Sophie Pitony write,
non-housing labor shares have remained broadly stable since 1970 for all advanced economies but the US. This is our main result. . . housing explains all of the decline in European total economy labor shares. The US NFC labor share is largely unaffected by housing or self-employment, so it still exhibits a sharp decline particularly after 2000
Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners.
Pointers from Tyler Cowen and David Henderson, respectively.
The attempt to divide all income between labor and capital is a fool’s errand. As I put it,
economists still inhabit the world of the 19th century, in which hordes of interchangeable workers in stark factories toil in the service of the owners of capital
Intangible factors matter more and more in today’s economy. You can choose to label the income that is derived from intangible factors “capital income,” in which case the “labor share” of income is declining. Or you can try to “correct” this by justifying labeling some of the intangible income as “labor” income. But what you really should be doing is abandoning the project of trying to view a modern economy through the lens of an aggregate production function f(K,L). It’s a really popular pastime, but it’s a crock.
“But what you really should be doing is abandoning the project of trying to view a modern economy through the lens of an aggregate production function f(K,L).”
Maybe a little harsh on the authors of the linked papers? Or maybe I misunderstand?
The article writers are doing the gods’ work by subverting the dominant paradigm that you so rightly condemn. The labor share narrative remains a powerful tool in the hands of the far left extremists in journalism and elsewhere and it is not going to be derailed overnight.
Your “wake up” article does a useful service in highlighting the anachronistic thinking that so often bedevils people writing in the economics vein. It may be useful to look at the phenomenon more closely to understand why economists are not likely to wake up any time soon.
An explanation that readily leaps to mind is the Sapir-Whorf hypothesis. Think of economics as a language with a limited vocabulary, much like Orwell’s Newspeak, and this makes it difficult or impossible for people to to write in the economics journals about the reality that you describe. A new word would be the key to open that door. How about say the Kling Production Function: f(K, L, R, I, nNth) wherein K is capital, L is labor, R is risk bearers, I is intangibles, and nNth are other undefined factors).
Perhaps we should also do our part to attempt to raise the status of those who write outside the mainstream by recognizing useful contributions from people outside the field. Someone like Bjorn Lomborg and the Copenhagen Consensus appear to get very little engagement from US economists but, he too, appears to be afflicting the comfortable in beneficial ways.
You also write that “a variety of indicators of economic well-being. They might include subjective measures of occupational satisfaction and consumer satisfaction. They might include objective measures that currently do not receive much attention, such as workplace injury rates for people in the labor force or rates of chronic health problems among the elderly.” But is it measures that we really need? More aggregate this and that and lumped together and prayed over with mumbo jumbo? If we really want to get away from aggregates, maybe we should see what can be accomplished in the opposite direction with case studies.
Case studies offer a means of identifying real barriers in real peoples’ lives without all the scientism of mainstream economics. Road to Sociology true, but, telling a story that affirms peoples’ experience can be a powerful influence on policymaking.
IDK, I know these measurements all have flaws but there should be a concern of libertarian economist of falling labor portions of the economy:
1) The best way for capitalism to gain popularity is thriving and everybody is getting more. US capitalism reached peak popularity in 1999.
2) There really is potential be economic problem of low birth rates. Show me how Japan gets out of their present situation or how increase economic entrepreneurship with falling labor supply.
3) The best to make young people Socially Conservative is make them Married with Children. (Daughters have more impact here but I am keeping simple.) How are you going to increase religious influence if young stay away from religion and forming families?
That matters a lot to higher-income earners. The lower you go, the more the old labor-capital distinction starts to become stark again.
Labor is responsible for most of the federal debt costs. Labor share twill drop as they cover the charges, directly or indirectly, with increasing federal debt.
They are??
Maybe so. But unless America crafts a better deal for the employee class, look for AOC in the White House.
The best tonic for America would be a couple generations of very tight labor markets, lower taxes on wages, decriminalized pushcart vending, and the elimination of property zoning.
Note how none of these topics are very popular among free marketeers and globalists.
* Tight labor markets
* Lower taxes on wages
* Decriminalized pushcart vending
* Elimination of zoning on property
…and you claim none of these are popular among free marketers? Set aside the first because it all depends on how these tight labor markets are to be created; the latter 3 are quite popular, especially lower taxes on wages and pushcart vending. In fact I think Reason.com featured an article on food trucks (very similar, albeit not exactly the same as pushcarts).
Well, I don’t see food truck regulation as “game changing” one way or the other, but it seems to me that if you are against taxes on imports, capital and wealth, by implication I don’t see how you can also be against taxes on labor…it is practically the only thing left.
Oh I guess you can be a land tax bro, but that is a different discussion.
Naval Ravikant predicts the dispersion of work with more individual owners instead of employees. That will have very dramatic impacts on politics and culture. One major change will be the tax system that is now is set up to abuse small business owners whereas the large corporation has pros, without personal investment, to handle all the government impositions.
https://youtu.be/3qHkcs3kG44?t=1430
This recent McKinsey study
https://www.mckinsey.com/featured-insights/employment-and-growth/a-new-look-at-the-declining-labor-share-of-income-in-the-united-states
improves on the purely academic take on this issue. They take a bottoms-up approach — by selected industrial sector — to better understand the top-down economy trends. Thy how that the headline “labor share is declining because of declining labor bargaining effect” plays a role in the decline, but not nearly as much as “capital effects” — capital share has increased because of higher share of profits is going to larger capital investments (think automation) and some of these investments have been accruing above average returns because of their nature (think patents, IP) or timing (think super-cycle effects in commodity and real estate prices).
The last three factors explain majority of the top-down trend. Not all uniformly across corporate sectors. Not all expected to continue. And, I would argue, that their analysis may not have even been able to resolve the self-proprietor allocation bias (which may show what some may like to think as labor share as capital share). It’s a more nuanced picture that does not seem to call for having to make existential policy decisions.
I first heard of Ray Kurzweil 15 years ago and would joke that you know we are solidly in the twenty-first century when an A.I. convincingly insists it is labor, not capital.
But this clear distinction had bothered me before 2004. Good posts on this.