Labor’s share of national income is declining

(Chart provided by Alan Beideck)

By most measures, this past Labor Day was a cause for celebration as workers have benefitted from the nation’s sustained economic growth.

The nation’s output, as measured by gross domestic product (GDP), has risen for eight consecutive years; it also turned in a stellar performance in the second quarter of 2018 with a 4.2 percent increase. Likewise, the number of jobs has risen for seven consecutive years and hit a record high of more than 150 million in June 2018. The unemployment rate is also down to its lowest levels in nearly 20 years.

By another measure — labor’s share of national income — workers have not fared well. Labor’s slice of the economic pie has shrunk significantly. (See chart.)

Trends in national income

Every few months, the Bureau of Economic Analysis, a branch of the U.S. Department of Commerce, publishes estimates of national output (GDP) and national income (GDI). GDP is based on a tally of spending, and GDI is based on a tally of income. One person’s spending is another person’s income, so GDP and GDI are twin measures of economic activity. They are not identical twins, though, because BEA estimates them based on different sources of information. GDP is based on tallies of spending including spending by consumers, businesses, government and foreigners who buy our exports. GDI is based on tallies of income received from wages, profits, interest payments and investments. As a portion of GDI, wages and other compensation earned by labor has been falling. Labor’s slice of the national income pie has been declining.

According to BEA’s latest press release, “Real gross domestic income (GDI) increased 1.8 percent in the second quarter [April to June]” of 2018, which is a substantial difference from GDP growth of 4.2 percent. Estimates of GDP and GDI often differ by substantial margins although they usually move in the same direction. The takeaway here is: the economy is currently strong and growing, but it is unlikely to be as strong as indicated by the second quarter GDP estimates or by the crowing of politicians on the campaign trail.

BEA’s income statistics also provide insight into who is, and who is not, benefiting most from the growth of our economy.

Labor’s share of national income

The Bureau of Labor Statistics, a branch of the U.S. Department of Labor, uses BEA’s income statistics to compile the share of national income earned by labor. According to BLS economists Michael D. Giandrea and Shawn A. Sprague, “The labor share is the percentage of economic output that accrues to workers in the form of compensation. It is calculated by dividing the compensation earned during a certain period by the economic output produced over the same period. The labor share is an indicator of the extent to which workers share in the economy’s output and is of interest to many. The measure is also of interest to workers, because it both describes the degree to which they are compensated for their efforts on the job and directly compares the output they helped produce with the compensation they received.”

As shown in the chart, since 2001, labor’s share of national income has suffered a sustained decline. Economists attribute that decline to several factors including the replacement of workers with technology (computer hardware and software) and offshoring of labor-intensive production.

Again, according to Giandrea and Sprague, “the labor share is of interest to government policymakers, who can have a substantial impact on the distribution of income in an economy through tax policy and spending initiatives.” The tax and spending bill (Tax Cuts and Job Act) enacted in early 2018 included steep cuts in business taxes, which increased profits. It remains to be seen if the increase in profits will be shared with workers; if not, labor’s share of national income will likely continue to decline. What we have seen, though, are anti-labor stances by the Trump administration, including the president’s recent proposal to freeze federal government workers’ wages. Those anti-labor stances will work to prolong the decline in labor’s share of national income.