Declining Labor Share and Rising
Income Inequality
By Margaret Jacobson
And Filippo Occhino
April 18, 2013
Indiana University Kelley School of Business
These are our views and not those of the Federal
Reserve Bank of Cleveland or the Federal Reserve
System…
Outline
• Define labor share
• Document the decline in labor share
• Causes of the decline
• Explore whether the decline can explain
increasing income inequality
Labor Share Definition
Labor Share Calculation
Labor Share Calculation
Labor Share Calculation
Labor Share
Labor income as a share of total income
CBO Data
NIPA Data
BLS Data
Source: Bureau of Labor Statistics/National Income and
Product Accounts/authors’ calculations
Interpretation
• Why is labor share not constant?
• Why is it trending down?
Causes of the Decline in Labor Share
Real Wage and Real Productivity:
Nonfarm Business Sector
Note: real calculations are based on the implicit output deflator
Source: Bureau of Labor Statistics
Growth Rates in Select Periods
Annual Percent Change
Note: real calculations are based on the implicit output inflator
Source: Bureau of Labor Statistics
Causes of the Productivity-Wage Gap
 Decreased bargaining power to labor
- Declining union participation
 Higher Returns to technology
- A given worker, with a given endowment of capital
can now produce more output in the same amount of
time.
 Increased globalization
- Labor intensive business can find cheaper labor
abroad
Caveats – Declining Labor Share
 Not limited to the U.S.
- OECD Employment Outlook (2012) shows that labor
share declined from 1990 to 2009 in 26 of 30
countries
- Karabarbounis and Neiman (2012) show that 36 of 51
countries saw a decline from 1975 to 2007
International Labor Shares
Source: Karabarbounis and Neiman, “Declining Labor Shares and the
Global Rise of Corporate Saving”
Caveats – Declining Labor Share
 Depends on how you measure labor share
- Rupert-Gomme (2012) argue that by adding housing
flows labor share is steady
Measurement Matters (Rupert-Gomme)
Source: Econsnapshot, Peter Rupert
Caveats – Declining Labor Share
 Classification of Income
- S-corporations may have reclassified labor income to
capital income
- Sole-proprietors and partnerships
- Gollin (2002) Labor income of the self employed is
often treated as capital income
 Ambiguous income
Impact on Income Inequality
 If productivity is increasing faster than wages,
more income is then accruing to capital share
 Capital owners tend to be those in the higher
income strata
 If a larger share of total output is accruing to those
with higher incomes, the decline in labor share
could be leading to increases in income inequality
Corporate Profits as a Percent of GDP and
Labor Share
Percent
Percent
Labor share
(right axis)
Corporate profits
Source: Bureau of Economic Analysis
Definition of Income Inequality
 Dispersion of household income relative to the
average household income.
 There are limits to what income inequality
measures
Household Income Shares
Percent of total income
Source: Census Bureau
Household Income Shares
Average growth rate
Source: Census Bureau
Gini Index
Rising Income Inequality
 Most of the increase since 1980 is due to returns to
education
 Wage differential between high-skilled and lowskilled
- More concentration of income at the top of the
distribution
 Labor Share
- Only responsible for 2.3 percent of 23 percent of
increase in the gini coefficient from 1970 to 2007
- Concentration of capital and labor income has more
of an impact
Income Concentration
Conclusions
 In theory, labor share should be constant but data
shows a decline over the past 30 years.
 Productivity growth outpacing wage growth
 Income inequality has been rising since the same
period labor share started falling.
 Declining labor share is only partially responsible
for the increase in income inequality. Other factors
such as increased concentration of labor income
and capital income are larger drivers of the
direction of income inequality.
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