THE IDEA that the spoils of the modern economy are unfairly distributed has become part of public discourse in the rich world. One common villain is the growing class of wealth-owners living off the returns from capital rather than hard-earned wages, an explanation popularised by Thomas Piketty in his book, “Capital in the Twenty-First Century”, published in 2013. The idea has gained currency with politicians. And studying the “labour share”, the slice of national income earned by workers through wages, has become something of a cottage industry in economics.
A new paper by Gene Grossman and Ezra Oberfield of Princeton University trawls Google Scholar and finds that more than 12,000 economics papers containing the words “labour share” and “decline” have been written in the past decade. Their review of the research suggests that economists’ understanding of why workers are taking home a smaller slice of the pie is murky at best.
One reason for this involves measurement difficulties. Official statistics suggest that America’s labour share fell by about six to eight percentage points between the 1980s and the 2010s. But Messrs Grossman and Oberfield list a number of recent papers that cast doubt on the numbers. A change to American tax law in 1986, for instance, lowered taxes for partnerships and other “pass-through corporations”, which had the effect of distorting the measurement of wages. After the tax cut, many more business owners began classifying their firms as pass-through corporations and their earnings as profits, which led to a decline in measured wages.
Another distortion comes from the use of gross national income to calculate the labour share, rather than a net measure that takes account of the depreciation of assets. Using the net measure, which may better capture income available for consumption, suggests a smaller fall in the labour share. That is because the growth of assets like computers has pushed depreciation rates up and weighed on net profits and national income over time. That in turn increases the labour share today.
Messrs Grossman and Oberfield put forward another reason for why the decline in the labour share is not well understood: economists’ many explanations are not consistent with each other. Researchers consider everything from automation to offshoring and rising corporate concentration. They use sophisticated methods to estimate the role of a given factor, holding everything else constant. But when the estimates are added together, the resulting number is too large. Messrs Grossman and Oberfield reckon that the total might come to three or four times the amount that the labour share actually fell by.
Why is this the case? The authors argue that researchers are proposing proximate causes for the decline, rather than fundamental ones. Many of the supposedly distinct factors may simply be different ways of labelling the same thing. Advances in information technology, for instance, have enabled the automation of many clerical jobs, while also enhancing the market power of some firms. Economists can tell themselves lots of stories, and those stories might even enter public discourse. But the truth remains elusive. ■
This article appeared in the Finance & economics section of the print edition under the headline "Pie in the sky"
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September 17, 2021 at 10:17AM
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