It’s conventional wisdom that labor’s share of the U.S. national income has plummeted. But by carefully accounting for stock-based compensation, three economists have found that the decline is smaller than is commonly assumed. For high-skilled workers, they conclude, there’s barely been any decline at all in the past four decades.
High-skilled workers earn so much of their pay in the form of equity-based compensation—about 40%—that they can be thought of as “human capitalists,” says a National Bureau of Economic Research working paper by Andrea Eisfeldt of the Anderson School of Management at the University of California at Los Angeles, Antonio Falato of the Federal Reserve Board of Governors staff, and Mindy Xiaolan of the University of Texas at Austin.
This chart, based on one from the paper, shows labor’s share of national income when only wages are taken into account (white line), along with the authors’ adjusted share taking into account equity-based compensation such as stock grants and options (blue line). The two lines began to diverge around 1980 and by 2019 were 7 percentage points apart (23% vs. 30%).
Labor's Share of National Income Hasn't Crashed
The decline is smaller when stock compensation is taken into account.
Source: Andrea L. Eisfeldt, Antonio Falato, and Mindy Z. Xiaolan
Going back to 1960 (not shown), the authors find that labor’s overall share of national income has fallen significantly, from about half in 1960 to 30% now. But since 1980, the addition of equity-based compensation reduces the decline in the share of national income going to high-skilled workers by 87%, the authors find. This isn’t a case of highly paid chief executive officers being counted as “workers.” Recent data show that 78% of equity-based compensation has gone to employees outside the C-suite, the paper says.
The unfortunate implication is that low-skilled workers have done even worse than commonly thought because their pay has by and large not been bolstered by stock grants and options. “Indeed, the high-skill share of total labor income increases from one third at the beginning of the 1960s to two thirds in the 2010s when equity-based compensation is included,” the authors find.
In an interview, Eisfeldt says the research has been controversial because it complicates the “stylized fact” of the recent decline in labor’s share of national income.
On the other hand, the research resuscitates an old belief, which is that labor and capital are naturally complementary such that the ratio of the two inputs tends to be stable over time. The apparent decline in labor’s share seemed to undermine that belief. But this paper shows that new technology does complement the skills of high-skilled workers, enabling them to be more productive and earn more. Unfortunately for less-skilled workers, capital seems to substitute for their skills, causing them to earn less, the study says.
The research has been circulating as a working paper for two years. The new version, released in May, adds details on how to calculate labor’s share of national income. U.S. Bureau of Labor Statistics data miss a lot of equity-based compensation because it’s taxed as capital gains, not pay. The authors filled in the gap by combing through filings to the U.S. Securities and Exchange Commission about shares reserved for compensation.
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