There are, by my count, now four main potential explanations for the mysterious slide in labor’s share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords.
Pointer from Mark Thoma. Smith’s essay is a useful summary. However, note that he writes this:
Matt Rognlie found that national income accounts showed an increasing amount flowing to owners of land. More recently, economist Dietrich Vollrath examined a paper by Simcha Barkai about rising profits, and found that profits from owner-occupied housing also rose sharply.
The national income accounts include a category called “imputed income from owner-occupied housing.” The term “imputed” is a fancy way of saying “made up.”
It is possible that the made-up numbers on income from owner-occupied housing make as much sense as anything else in the national income accounts. In that case, there might really be something going on that has increased the share of income accruing to land and reducing the share accruing to labor. But keep in mind that land is not homogeneous, and neither is labor. And keep in mind that if the ratio of house prices to income falls back to what Robert Shiller thinks is the normal level, these land-owners all of a sudden are not going to feel so rich.
To refer back to some prior posts; what is disclosed when the so called “shares” are measured by elements of consumption (even when expressed as purchase price equivalents) and consumption patterns?
Hmmm. The ratio of house prices to income. What does that ratio mean? Do you remember that “income” includes a wide variety of imputations, including income from imputed home rental?
Do you disagree with the theory that those who own durable goods (notably housing) receive an implicit rental income from that ownership? Suppose everyone rented their house. The rental income would be part of the gross revenue of landlords and part of consumer spending, and the profits of landlords would be part of national income.
Now suppose that everyone bought their houses, so there are no landlords any more, just homeownership. If we exclude imputed rental from GDP, then GDP would plunge substantially. Shelter rent would go from a large number to zero. Yet, nothing tangible in the economy would have changed, only the pattern of ownership would change. That seems absurd. So we make due with imputed rentals as a second best solution. As Keynes put it, I would rather be approximately right than precisely wrong.
The numbers are not “made up.” They are estimated. That is not the same thing.
Why should we care about whatever number we get for GDP- high or low? Note that everyone suddenly renting or everyone suddenly buying isn’t a transition that is happening or likely to happen.
The problem with the theory that those who own durable goods – notably housing – receive an implicit rental income from that ownership, is that it leads to calls – and I’ve seen them in real econ papers – to tax that implicit income. At which point you don’t really own your durable goods anymore, you just buy the right to rent them from the government.
“The problem with the theory that those who own durable goods – notably housing – receive an implicit rental income from that ownership, is that it leads to calls – and I’ve seen them in real econ papers – to tax that implicit income. At which point you don’t really own your durable goods anymore, you just buy the right to rent them from the government.”
But every state in the nation already has a (real) property tax. And some still have personal property taxes (they used to be more prevalent). You already “pay rent” on your property in the U.S. of A.
Also, if calculating imputed rents, it’s important to exclude income from gains on sale of the assets, otherwise you’re double-counting income. But perhaps that’s already done (I’m no expert on the calculation of GDP).
Tom,
If ‘imputed rent’ is basically (in theory) appreciation in value minus depreciation due to ‘consumption’ of housing, then this imputed income is basically like capital gains, only with a lower turnover than, say, stocks. By your logic, one could argue against counting capital gains as income, and instead treat them as commodities appreciating in value.
This isn’t really a disagreement though, since I wouldn’t mind seeing capital gains tax dropped to 0.
It is worth noting though that the current property tax is arguably ‘worse’ than merely taxing imputed rent. An imputed rent tax would only apply to increase in value (if I understand correctly) but property tax is based on total value, making it a confiscatory tax.
Are we also imputing the value of home production (cooking, house-cleaning, yard work, DIY home repair, child care, etc, etc) and adding all that to the labor side of the ledger? If everybody hired outside labor to perform all these functions, then GDP and the ‘labor share’ would also rise.
But in any case, if the decline in labor share can be attributed to the increase in imputed rent of privately owned homes, that has quite different political overtones, no? It’s one thing if owners of productive land and capital equipment are gaining. It’s quite another if the gains are going to hundreds of millions or even billions of workers who also own their homes. All it means then is that a greater fraction of household income is coming in the form of imputed rent.
Slocum, to double down on your point, imagine telling the population “don’t worry about stagnating wages, because your income is actually going up! Look at all the imputed rent you get from your home!”
Oh – P.S., we’re thinking maybe we should tax you on that imputed income…
While finishing school in Palo Alto 35 years ago, my roommate and I bought a house together for about $150k. He was getting married, so we sold after two years, very small gain; but since then, house prices have exploded. That same house would be about $2,000,000 today. If the folks who bought it from us had kept it, they’d have made literally, millions — in imputed if not actual rent.
Some (too small) number of such hugely increased value houses are realized each year, with big money gains to the selling owners.
For the houses that are sold, the owners see an increase in monetary wealth — and that money has to come from somewhere; it’s part of the zero sum yearly money flows that include all wages, investments, & capital gains.
I think house price increases sucking out labor wage increases seems entirely plausible, with the wage increases near the highest housing increases going up (that’s where the good jobs are), but the rest of country seeing less money, so naturally less to the local labor there, where are fewer good jobs.
There are, by my count, now four main potential explanations for the mysterious slide in labor’s share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords.
First that should be Oligopolies as there are few true monopolies in our global economy. We see lots of profits for Facebook, Coca-Cola, and Apple but it is call them monopolies.
2) In terms of robots, my guess this is true but also the price of robots/Capital is dropping.
3) Realize the gains of housing values also become retirement savings for a lot of people.
Let’s say all the residents of West Virginia picked up and moved to Virginia.
We’ll refine a little by saying it’s all except the ones making money off the geography of West Virginia itself – farming, tourism, or extracting natural resources, which is only a minority of the labor force, even in West Virginia.
That will help to justify a guess that overall GDP will remain about the same.
However, one would expect the new Virginia average wage to drop, and with a skew of intensity in the sectors where old West Virginians were already working.
Furthermore, Virginia will now be more crowded, especially the cities. The Virginia countryside is already being worked at about the ‘best practices’ level of efficiency, and can’t really make much more use of more cheap laborers. So the West Virginians will probably be looking for urban and suburban service sector work.
And since they’ll have to live relatively close to where they work, the increased crowding will put upward pressure on the price of land. Not to mention putting pressure on infrastructure, which in the US is hard to expand in adequate time to meet the needs of a fast growing population.
In this crazy thought experiment, what is our best guess for what will happen to the labor share, and to landlord rents?
Much closer to housing, or more accurately land, as investment rather than store/consumption.