Estimating the U.S. labor share

[mahatmakanejeeves]

February 2017

Estimating the U.S. labor share

The labor share—the fraction of economic output that accrues to workers as compensation in exchange for their labor—was thought by some early-to-mid-20th-century economists to be relatively stable. Yet its decline during the second half of the 20th century and on into the early years of the 21st century has shown otherwise, attracting the interest of many researchers. This article reviews the BLS labor share methodology, discusses the uses and limitations of the BLS labor share measure, and suggests ways that BLS might improve the measure.

The stability of the proportion of the national dividend accruing to labor, irrespective apparently of the level of output as a whole and of the phase of the trade cycle…is one of the most surprising, yet best-established, facts in the whole range of economic statistics, both for Great Britain and the United States.—John Maynard Keynes, March 1939

Some facts turn out to be temporary. This is what John Maynard Keynes would have discovered had he lived to see the decline in the labor share during the second half of the 20th century. Keynes and other economists had accepted as fact that the share of national output accruing to workers as compensation was relatively constant. In fact, this idea had become so well accepted that some economists even began using the supposed constancy as an issue to be addressed in theories of production and economic growth. The term “Bowley’s Law,” referring to a 19th-century economist who had compiled statistics on the issue, was even coined to describe this stability.

The stability of labor’s share of output had been unexpected because there had previously been an assumption, dating back to Ricardo, that the labor share would tend to vary with the quantity and quality of other factors of production. Consequently, the considerable changes to the U.S. and world economy over the early 20th century—including “phenomenal changes in the techniques of production, in the accumulation of capital relative to labor and in real income per head”—would have led many to expect sizable changes in the labor share over time. In addition, the considerable variation in the labor share across industries in advanced economies over the period made the relative stability of the economy-wide labor share all the more surprising.

However, in the late 20th century—after many decades of relative stability—the labor share began to decline in the United States and many other economically advanced nations, and in the early 21st century it fell to unprecedented lows. In response, an academic literature developed that attempted to determine the reasons for the decline and to consider the implications for economic theory and for economies throughout the world. The fact that the labor share declined simultaneously with increased attention on income inequality in many countries has further focused economists on studying the distribution of economic output. In view of the increased interest in the labor share in recent years, we are presenting detailed information on how the U.S. Bureau of Labor Statistics (BLS) estimates this measure. The material that follows reviews the BLS methodology for estimating the labor share, discusses the uses and limitations of this measure, and suggests potential improvements in that methodology.

What is the labor share?

The labor share is the percentage of economic output that accrues to workers in the form of compensation.
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About the Author{s}

Michael D. Giandrea
[e-mail]

Michael D. Giandrea is a research economist in the Office of Productivity and Technology, U.S. Bureau of Labor Statistics.

Shawn A. Sprague
[e-mail]

Shawn A. Sprague is an economist in the Office of Productivity and Technology, U.S. Bureau of Labor Statistics.