For much of the postwar era, workers took home about two-thirds of total income in the United States, while business owners earned the other third. This relationship between labor and capital was so steady, in fact, that for decades it was considered something like a macroeconomic constant. But in the early 1980s, labor's share of income began to decline. Business productivity continued to increase, but workers' wages didn't rise as quickly as before. Instead, rising corporate profits were increasingly captured by the owners of capital, driving income inequality to record highs.
Technology, the decline of unions and financialization
There are a number of explanations for this divergence. Certainly technology has played a role, as advanced manufacturing processes, automation and productivity-enhancing software have made it easier than ever for companies to lower labor costs by laying off workers and cutting benefits. Decades of de-unionization have made workers particularly vulnerable to these cuts, while elevated unemployment has decreased labor's bargaining power.
At the same time, outside pressure from private equity and hedge funds have reconfigured corporate governance, forcing publically-traded companies to prioritize rising quarterly profits and investment returns at the expense of both labor and innovation. This so-called “shareholder value” revolution, which began in the early 1980s, is one reason why compensation for financial intermediaries and other money-managers now composes nearly 9 percent of GDP, leaving less income for traditional wage-earners.
Income inequality within the labor share
As a result of these and other changes, labor income as a share of total income is now at its lowest level since the end of the Second World War. According to data from the Bureau of Labor Statistics, income from wages, salary and compensation now accounts for only 58 percent of total nonfarm business income, down from an average 65 percent during the postwar period until 1980.
Recent analysis, however, suggests the situation is in fact worse than it appears. In a report for the Brookings Institute released last week, economists Michael Elsby, Bary Hobijn and Ayşegül Şahin find that rising inequality has obscured the full extent of labor's decline. Setting aside the remarkable gains of the richest 10 percent in recent decades, as well as income from self-employment (which is misleading for technical reasons) the author's reveal that the labor share of income for the bottom 90 percent of wage-earners has fallen much further than the headline indicator suggests. The decline of labor in the United States, in other words, is fundamentally a middle-class phenomenon.
Counting only data from payrolls (a more accurate reflection of middle-class incomes), the graph below illustrates how the bottom 90 percent share of nonfarm business labor income fell from an average of 42 percent from 1948 to 1980, to around 35 percent in the mid-1990s, and finally to a historic low of about 27 percent in the aftermath of the Great Recession. The richest 10 percent, meanwhile, increased their share from an average of about 15 percent during the postwar expansion, to over 25 percent today.
In a second graph, taken directly from their Brookings paper, Elsby, Hobijn and Şahin show how nearly every increase in the labor share of income over the last thirty years was driven by higher income inequality, particularly in finance and technology. According to the authors, “around half of the rise and subsequent fall in the aggregate payroll share between 1998 and 2003 can be attributed to changes in the payroll shares in these sectors alone.” The same holds true for the period surrounding the financial crisis, although with a greater role for investment banking and securitization.
Globalization, offshoring and the “Age of Oversupply”
The report's authors don't discount the importance of technological change or financialization in this story. Their regressions find “limited support” for typical bogeymen like automation and de-unionization. But in a somewhat surprising development, Elsby, Hobijn and Şahin identify global import competition and offshoring in the labor-intensive sectors of the economy, like trade and manufacturing, as “a leading potential explanation of the decline in the U.S. labor share over the past 25 years.” That may not surprise the millions of former factory workers whose jobs have already been outsourced to low-wage countries like China or India, but it's still a controversial argument among policymakers who have long assumed the benefits of free trade.
Elsby, Hobijn and Şahin aren't the only ones challenging the neoclassical orthodoxy accepted by both political parties. Century Foundation fellow Dan Alpert has also made the case that workers in the developed world are suffering as a result of import competition. In The Age of Oversupply (available September 26), Alpert describes how the end of the Cold War (“the fall of the Bamboo and Iron curtains”) put approximately 1.7 billion new workers into direct competition with the developed world between 1980 and 2010. The result has been an incredible oversupply of labor, creating a flood of excess capacity and driving wages down and jobs overseas.
That's great news if you're a factory worker in Shenzhen or buying a flat-screen TV for $200, as the Wall Street Journal's Andy Kessler puts it. It's not-so-great news if you're a former factory worker in the United States. But with the sky-high savings rate in China and the rest of the developing world fueling a sea of cheap money, at least you can still get a good deal on a credit card.