The Declining Labor Share of Income
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Francisco Rodriguez
Abstract
We use two separate panel datasets, one at the economy-wide level and one for the manufacturing sector alone to examine trends in the labor share over the last three decades. Both datasets show that labor shares have decreased, starting from about 1980, in most regions of the world. This finding is robust to adjustments for self-employment as well as adjustments for the unbalanced panel structure of both datasets. Furthermore, we present evidence that as a first approximation, this decrease is driven by declines in intra-sector labor shares as opposed to movements in activity towards sectors with lower labor shares. Finally, we show that global labor share at the economy wide level has been falling.
The authors would like to thank, without implicating, Zachary Gidwitz, Mark Purser and Martin Heger for research assistance, Arindrajit Dube, Ethan Kaplan, Jeni Klugman, Suresh Naidu, Sanjay Reddy and an anonymous referee for useful comments.
Appendix 2: Variables Used
1. Labor Share UN SNA 1993: Defined as compensation of employees/gross value added. The data was obtained from the detailed aggregates table of the UN national accounts, table 203 using SNA 1993 methodology. Where multiple series were available (since UN collected data using multiple methods), we applied the growth rate of labor share from later series to the labor share derived from earlier series.
2. Labor Share UNIDO: Defined as wages and salaries/gross value added. The data is obtained from the UNIDO industrial statistics database, using the 3 digit classification.
- 1
One could begin indeed with Adam Smith, 1776 and continue through David Ricardo 1891; Karl Marx 1861; John Maynard Keynes 1939; Simon Kuznets 1933, 1959, 1966; D. Gale Johnson 1954; Robert Solow 1957, 1958; Nicholas Kaldor 1961; Irving Kravis 1962, 1966 and through to more recent times.
- 2
It is important to note a few issues with the data. While, in theory, the informal sector is to be included in the data, in practice, by their very nature, enterprises from this sector may not be. Gollin (2002), Bernanke and Gurunayak (2002) and Krueger (1999) flag another connected problem. They all note that the earnings of self-employed persons are not included in the series and, as such, their earnings are falsely considered as accruing to capital.
- 3
The results of our analysis do not alter significantly if we use compensation of employess+operating surplus as the denominator rather than gross value added, thereby expunging the effects of indirect taxes and subsidies.
- 4
For more details about this dataset and its appropriateness for examining cross national differences in factor shares, see Ortega and Rodriguez (2006).
- 5
This adjustment assumes that the entire operating surplus in unincorporated enterprises is wage income. The correlation is still present when one uses other adjustments as well.
- 6
The interested reader can see Syrquin (1984) or Timmer and Szirmai (2000) for a detailed exposition of the methodology. Those papers deal with a shift share analysis of labor productivity changes, but the analysis can be carried over directly into an analysis of the labor share by simply changing labels.
- 7
We chose the wage bill as the weighting variable rather than value added to avoid negative weights that occur when value added is negative for some sectors.
- 8
Another point of evidence for the dominance of within sector effects is given by an examination of the trends for each subsector. In the UN dataset seven out of 11 subsectors show statistically significant time trends for labor share in the period, and two out of 11 subsectors show statistically significant positive time trends. In the UNIDO dataset seven out of 29 subsectors show statistically significant negative time trends for labor share in the period, and only one out of 29 subsectors show statistically significant positive time trends.
- 9
Data on the labor force was obtained from the world development indicators.
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Articles in the same Issue
- Research Foundation
- Caught in a Poverty Trap? Testing for Single vs. Multiple Equilibrium Models of Growth
- Macroeconomic Policy Coordination in a Competitive Real Exchange Rate Strategy for Development
- Policy Analysis
- The Declining Labor Share of Income
- The Structure and Dynamics of International Development Assistance
- Latin America’s Trade and Growth Patterns, the China Factor, and Prebisch’s Nightmare
- Export Similarity Networks and Proximity Control Methods for Comparative Case Studies
Articles in the same Issue
- Research Foundation
- Caught in a Poverty Trap? Testing for Single vs. Multiple Equilibrium Models of Growth
- Macroeconomic Policy Coordination in a Competitive Real Exchange Rate Strategy for Development
- Policy Analysis
- The Declining Labor Share of Income
- The Structure and Dynamics of International Development Assistance
- Latin America’s Trade and Growth Patterns, the China Factor, and Prebisch’s Nightmare
- Export Similarity Networks and Proximity Control Methods for Comparative Case Studies
