E Labor Share Of GDP Has Been Dropping In The World’s Four Largest Economies

The following charts illustrate that labor’s share of GDP has been shrinking in each of the four largest economies in the world. This phenomenon is, of course, the mirror image of the increased income and wealth inequality which has also emerged in most countries across the world.

The dashed lines represent the trend that has been dominant since 1975. In all four countries, the trend lines are downward sloping and are statistically significant. Indeed, the same kind of decline in the labor share of GDP has occurred in many other countries as well. (See Loukas Karabarbounis and Brent Neiman, The Global Decline of The Labor Share, Mar.2016) 

As for explaining why this widespread decline in the labor share of income has occurred, there seem to be approximately four somewhat related explanations.

The four typical explanations are: 1) China and globalization, 2) robots and new technology displacing jobs, 3) the increased monopoly power of business at the expense of labor, and 4) the shift of housing wealth towards landlords.

The theories all seem to have some credibility, but none alone provides a complete explanation. (See Noah Smith, Bloomberg View, April 24, 2017)

The China explanation centers of the opening up of the Chinese and Indian economies, together with the effect of new globalizing technologies such as the internet and containerized shipping.

Low-cost labor in the emerging market countries together with multinationals shopping around for cheap workers has clearly raised profits at the expense of wages and salaries.

However, China’s workers are also experiencing a similar declining share of GDP.

Thus, the explanation centered on monopoly power, robots and globalization all seem part of one unified phenomenon.

Finally, this writer does not buy the argument that the shift of housing wealth is a main precipitating factor behind the declining labour share.  

Disclosure: None.

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Gary Anderson 11 months ago Contributor's comment

The new normal has been in the works for awhile. Minimum wage should be over 20 bucks an hour based on what it was in the 1960's.