BLS Overstates Drop in Labor Share
By David Henderson
One of the most striking and troubling patterns in the US economy in recent decades is the “declining labor share: that is, the pattern that the share of the value of output (in the nonfarm business sector) that goes to workers in the form of compensation, which includes benefits as well as wage and salary compensation, has been dropping. The labor share was typically in the range of 63-65% from the 1950s into the early 1970s. By the 1980s and 1990s, it was more often falling in the range of 61-63%. In the early 2000s, it fell below 60%, and since the end of the Great Recession in 2009 it has typically been between 56-58%.
This is the opening paragraph of Timothy Taylor’s excellent post “The Declining US Labor Share, Explicated,” Conversable Economist, February 27, 2017.
Timothy goes on to summarize a Bureau of Labor Statistics article by Michael D. Giandrea and Shawn A. Sprague in the February 2017 issue of the Monthly Labor Review.
Here’s the section of Timothy’s post that I found most interesting:
The underlying assumptions about “proprietor income” are biasing the labor share calculations.
The calculation of labor share involve adding compensation received by employees to “proprietor income,” which is the labor income received by those who run their own business. However, proprietor income is conceptually tough to measure, because someone who owns their own business can receive both “labor income,” as if the person was an employee of their own business, and “capital income,” as the owner of the business. In the real world, these two types of payments are jumbled together. To address this issue, the Bureau of Labor Statistics has assumed that the hourly labor compensation of proprietors is the same as that of employees. However, if the labor income of proprietors is actually rising over time, then this assumption means that the labor share is understated. One study finds that about one-third of the observed decline in labor share is due to this assumption that the hourly labor compensation of proprietors is the same as that of employees, rather than using an alternative method that tries to estimate the capital income of proprietors directly. (bold and italics in original)