On Labor and Its Share

A lot of people are talking about labor’s declining share of economic output, de-unionization, and stagnating median wages. These three phenomena don’t have to be causally linked, but there tends to be a bit of hand-wavy rhetoric to this effect. Considering the political centralism of labor as an idea, this isn’t surprising.

The link between the median worker and labor share is today tenuous at best. Labor share falls when investment analysts or doctors are replaced with high speed algorithms and robots. Labor share also falls when a farm hand is given a high-powered tractor. I happen to think that both of these are great trends. Remember, capital productivity is the only way to keep expensive American labor competitive on an international market.

A conversation about “labor’s share” divorced from one about distribution of human and physical capital will lead us to profoundly confusing results. Important to note at this point, division of income is not a question on redistribution. Certain European countries have deeper safety nets, and that may well be a desirable goal, but it’s ridiculous to think that we’re at a point where more redistribution, especially through the right channel, will fundamentally distort the labor-capital dynamic. This is relevant both to conservatives who believe a higher tax rate is inherently distortionary as well as liberals who want bigger labor as an end in and of itself. I don’t want people to think that accepting a declining labor share requires an abdication of the welfare state.

The debate about labor share is often intimately connected with that about unionization across the rich world, which has been in secular decline for the past quarter-century. However, it’s unreasonable to think that reunionization, by itself, would elevate labor. To maintain employment with high union density, we would need to make it difficult to hire and fire workers. We would need to reinstitute protectionist tariffs. We would have to devalue the dollar more than otherwise. In other words, we would need to dismantle the very system of free trade we’ve built for over half a century. So the question about share of GDP is more about overall labor policy, than unionization itself.

This is to say that, in a globalized world, were we to reinstitute industrial policy, corporations would flee. This assumes that a large part of labor’s decline has come from international competition but, as Timothy Taylor here notes, the decline is shared across capital and labor intensive sectors; murky factors at least vaguely connected with globalization are key.

None of this would make labor richer. It would increase its share of the income and, perhaps, even decrease inequality. Let’s consider the counterfactual wherein we maintain our unions in relative strength over the past three decades. We would probably look like France (where capitalists can’t close factories).

In France:

• Labor protectionism (like making impossible to fire workers or close factories) is the mantra versus America’s “flexicurity” (things like unemployment insurance or reemployment credits).
• Labor share is of GDP is about 70% versus America’s 50%.
• Labor share has increased by 10 percentage points over the past two decades; it has decreased by the same amount in the United States.

Also:

• America has the highest disposable income in the OECD (a measure I like much more than pure per capita GDP; and this includes oil-crazy Norway). Compare its $42,050 with France’s $27,452. That’s 155%.
• But I don’t need tell you America’s rich. Our labor force is also pretty robust. We have a natural rate of unemployed at about 5%. It’s 7.7% in France. Another way to read that is our unemployment during a cyclical-crash is better than theirs in equilibrium.

But hey, at least labor gets all the income, right? Oh, and as it turns out – this is news to me – union density is actually a little higher in the United States. I don’t take this to mean much as we’re gouging organized labor here across the pond, but it does refute the naive “unions increase labor share” theory some advance. It also confirms my point that successful unionization (in the sense of a higher labor share) requires locking labor markets like the French.

America is no doubt richer than most countries for a variety of reasons entirely independent of flexible labor policy. But generally low unemployment rates (we’ve adjusted rather well to China so far, and employment didn’t plummet after the construction bubble blew) are a sign that labor policies don’t benefit, well… labor.

Median wages have stagnated this decade. That’s sad. But maybe it has nothing to do with the fall of unions and/or labor share of GDP. It’s better than wage decline which might have been the result of confused policies. There are two reasons it sucks to be a median worker in America today:

1. Physical capital is exceedingly owned by the rich, so you can see where a rising capital share goes.
2. Human capital is a big part of “labor’s” share, and that’s also disproportionately spread.

To fix this, we need an imaginative safety net that distributes capital, not cash. Ideally, we would have some kind of inheritance tax that takes all capital stock at death, throws it into a fund, and progressively distributes ownership thereof. This becomes hectic with family-owned businesses and small plots of land, and requires another post to tease out, but in theory it does the job.

We also need to educate the “poor” in a better way. This means more blue-collar jobs, believe it or not. We’ve been spending lots of money on graduating Bachelors, but what we need is technical schools that teach everyone solid engineering and calculus. Not the kind that you need to understand marginal economics, but make America competitive in the “upper blue collar” category. (And, for what its worth, “lower blue collar” guys also use more math than the median white-collar worker). We also want doctors to be paid fairly, which is to say a lot less than what they are now. How do labor share advocates support that?

Two-year colleges are cheaper and, most importantly, let you live with your parents. This is an inexpensive, supply-side tool that’s woefully underutilized as far as “labor” is concerned. By the way, this might cause capital share of income to increase: but only because the median worker can use advanced tools more efficiently.

It’s vogue to criticize the marginal productivity theory of wages because workers have gotten a lot more efficient without seeing a commensurate increase in wages. There’s a lot of merit to this claim, but it’s important to note that global competition has eaten any would be raises; the question is to track wages in the counterfactual exclusive of India and China.

Ultimately, fighting capital as France does is a loosing battle for labor. The safety net should come from capital redistribution and flexible stabilizers like unemployment insurance and reemployment credit. This makes it easier to hire and fire, both signs of a robust labor market. It’s time to start talking about labor and not Labor.