Three Measures of Labor's Share

By John Mullin

Econ Focus

Second/Third Quarter 2019

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Much effort has been spent trying to ascertain whether the recent decline of labor's share of national income has been something of an artifact of accounting issues. The BLS headline figure for labor’s share is based on the U.S. nonfarm business sector, which excludes the household, farming, and government sectors. (See chart.)

One objection to this measure has been its treatment of proprietors' income. A typical proprietor is a business owner who puts in working hours but has also invested money in the business. Consequently, proprietors' income is best thought of as a combination of employment compensation and return on investment. There are several methods of dividing proprietors' income into these two components, but none of them have a particular claim on accuracy, including the method the BLS uses to construct its headline number for labor's share.

The problem with proprietors' income can be dealt with by focusing instead on the BLS number for labor's share of corporate sector gross income, which excludes proprietorships. This number correlates highly with the headline number. But economists have also criticized the appropriateness of this statistic because it is calculated gross of depreciation and thus arguably overstates earnings. After all, depreciation is a real cost of doing business.

Main Story

Workers' Shrinking Share of the Pie

Economists have advanced a wide variety of explanations for why workers' share of overall income has been going down

The problem with depreciation can be handled by focusing on the BLS number for labor's share of net corporate sector income. This figure is, of course, higher than labor's share of gross income because the numerator (labor compensation) is the same and the denominator (net corporate sector income) is smaller. What stands out is that labor's net share actually trended upward, at least modestly, during 1947-2000. The growing discrepancy between the net and gross numbers during this period reflected an upwardly trending rate of depreciation, which economists have generally attributed to the growing importance of IT investments with relatively short lives.

All three measures of labor's share have declined substantially over the past 20 years, which suggests that the change has not been a result of measurement issues tied to proprietors' income or depreciation. While there have been other critiques of BLS labor-share calculations, a consensus among economists has emerged that the decline in labor's share is a real thing, not just a statistical artifact.

Tim Sablik