The Gold Standard | The shrinking labour share

  • The labor share as reported in the revision to 3Q productivity and costs released this week fell to a new all-time low. In the business sector 57.1 cents on every dollar of value added was paid to labor; that is down from the average of 63.9 cents that prevailed prior to 2000. To put that in perspective: if the labor share were merely where it was prior to the most recent downturn, the annual labor income of the household sector would be almost $400 billion higher; if it were at its pre-2000 average, labor income would be $780 billion higher.
  • The decline in the labor share did not begin recently, but instead has been an ongoing trend in the US data since the 1980s.
  • The downward trend in the labor share has been amplified recently by the cyclical weakness in the labor market. This may seem obvious, as workers lose bargaining power in a soft job market. However, this was not always the case—to the contrary, 20 years or more ago it was taken as an established fact that the labor share was countercyclical, rising when the economy is weak and declining when it is strong.
  • studies that examine the relation between trade openness and the labor share generally find an inverse correlation: across a number of developed countries, greater openness to trade has reduced labor’s ability to obtain a bigger slice of the pie.
  • prior to 1983, a 1%-pt rise in the cyclical unemployment rate was associated with a 0.3%-pt rise in the labor share. After 1983, that same rise in the unemployment rate occurred alongside a 0.7%-pt decline in the labor share.
  • this change in cyclicality may have occurred in the early to mid-1980s, when the labor share began trending lower.
  • The trend decline in the labor share was initially met with the crutch of household debt, filling in the gap in household income to support consumption growth. With that crutch now having crumpled beneath it, the household sector has had to rely on increased support from the government sector. How household spending aspirations interact with an unsustainable fiscal outlook remains unresolved.

Source: US: the incredible shrinking labor share, JP Morgan Research Note, December 2, 2011

It is not too difficult to guess why all roads lead to the 1980s as the starting point for these important structural shifts. That one-generational shift would end in 2012 and start to reverse. This is, of course, a prediction and subject to error of timing. But, the shift is bound to occur some time in the not-so-distant future.