Why Is Labor’s Share of GDP Declining?

At Bloomberg View Noah Smith considers the factors that have led to a decline in the share of GDP that goes to labor. He discusses four:

Economists are therefore scrambling to explain the change. 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.

Read the whole thing.

To those I would add two: open borders and massive subsidies to capital intensive but not labor intensive industries.

The problem doesn’t need to have any single cause. Those factors operate synergistically to create the observed effect. And that synergy will make it darned hard to end.

4 comments… add one
  • Ben Wolf Link

    Smith gets the China bit wrong. China is a net exporter of capital, not an importer. Wages, and therefore demand, relative to its economic growth have been suppressed thanks to its neo-mercantilist policies for export-driven growth, at the same time as foreign demand for Chinese products has remained depressed.

    It’s a model that’s past it’s sell-by date.

  • I’ve been complaining about the Chinese authorities’ economic strategy for decades. It’s coming back to bite them now. Chinese growth must come from increasing PCE. The deadweight loss on centrally-planned and local government spending has been colossal. Not even China can stand that level of waste.

    None of this was unforeseen. The Soviet Union had precisely the same problem. Unlike the Soviets the Chinese were able to divert unproductive labor resources from agriculture to manufacturing without reducing production. They haven’t been able to avoid the inefficiencies of their wasteful government spending.

    They’ve got to loosen the reins. I think they’re afraid.

    Update

    It occurred to me that fans of big government would take umbrage at my remarks above. All centralized planning, whether government or private, is relatively inefficient. The difference between the government and the private sector is that at least under theoretical circumstances the private sector has to contend with market discipline which the government doesn’t.

    One of the roles of government should be to make real conditions approximate the theoretical. Level the playing field. But our government is corrupt and doesn’t do that. China’s is even more corrupt. Instead they subsidize inefficient “private” business.

  • Guarneri Link

    I wish I could find (maybe you can) data that goes back further than 1950. But Uncle FRED produces a labor wage to GDP chart that shows two distinct ratchets down from 1950-2015, in the 70’s and the aughts. Totally counter intuitive, given the dot com bubble, a local maximum is seen at the end of the 90s / 2000. Any analyses pointing at China and robots will have to deal with the 70s, at least.

    Its speculation, but consider the following. The highest employment sectors (>5%, and an aggregate 45%) are (in descending order): retail, accomodations/food service, government, local education and pro/tech services. I’ll bet a good fraction of these are relatively low pay, and garnering a bigger population fraction over time. One would expect an aggregate statistic like wage/GDP to fall over time. And for those of you convinced that CEO pay is the root of all evil, the aggregate managerial job population is 1% of total.

  • steve Link

    “the aggregate managerial job population is 1% of total.”

    And what is their percentage of total income and wealth? The issue os not how many but how much.

    Steve

Leave a Comment