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Labor share is falling down, but which one?

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  • Alessandro Bellocchi

    (Department of Economics, Society & Politics, Università di Urbino Carlo Bo)

Abstract

Economic theory frequently assumes constant factor shares and relegates the functional distribution of income to a secondary role. Although there are several reasons behind this, one of them is certainly related to their complex nature. Factors shares are conceptually difficult to define and even more difficult to measure. Indeed, the labor share of income is computed as a ratio between labor compensation to aggregate income, however, several adjustments are required. For what concerns its denominator taxes on production and imports (minus subsidies) must be subtracted from gross value added at market prices, while capital income needs to be calculated net of capital consumption, as this is the relevant measure when discussing inequalities. Finally, turning to the numerator, the total compensation of employees needs to be adjusted for the income of the self-employed. In this case the most common correction increases the compensation of employees with part of income from other categories of workers, assuming that they earn a salary which is equal to the average salary of the employees. To sum up, all these choices carry with them a degree of arbitrariness that inevitably leads to different estimates for the labor share. Exploring how the labor share is constructed, considering the approaches used to adjust it and doing a comparison with existing measures is the aim of this paper. We employ multilevel U.S. national account data and find that while the unadjusted labor share remained almost constant, the adjusted labor share decreased more or less markedly depending on the method employed for the adjustments and the choice of denominators. Further, the virtual stability hides a significant composition effect that is ultimately detrimental to labor.

Suggested Citation

  • Alessandro Bellocchi, 2020. "Labor share is falling down, but which one?," Working Papers 2001, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2020.
    • Handle: RePEc:urb:wpaper:20_01
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    References listed on IDEAS

    as
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    Keywords

    Factor shares; Income distribution;

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