Why U.S. Workers Are Getting Short-Changed
A spate of one-day strikes by fast-food workers has renewed the focus on the abysmal pay for so many at the bottom of the U.S. labor market. Amid all the discussion, a theme keeps cropping up: Labor's share of national income has plunged while corporate profits have climbed to record highs.
The numbers are telling. After peaking in the early 1980s at about 66 percent, U.S. workers have seen their share of the national pie decline to about 58 percent, the lowest since at least the end of World War II, according to the Bureau of Labor Statistics. The figures include non-cash benefits such as health insurance and retirement benefits, which soared during the period.
It's tempting to blame one political party or the other, but the decline occurred under both Democratic and Republican administrations, with the sharpest drops coming during the presidencies of George W. Bush and Barack Obama.
This isn't just taking place in in the U.S., either. A 2012 report by the Organisation for Economic Co-operation and Development found a similar pattern in 26 of 30 wealthy countries, with workers' share of national income falling on average to less than 62 percent in 2009 from about 66 percent in 1990.
Maybe this trend has something to do with the economic structure of developed nations that shifts income away from workers? Not so, according to a study by the International Labor Organization, which found that labor's diminishing take "was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America. …The data available for China, Kenya, the Republic of Korea, Mexico and Turkey … suggest that the decline in this group of countries may already have started in the 1980s.''
The Great Recession probably isn't the culprit, either. If anything, the decline was probably slowed or even temporarily reversed during the financial crisis and the immediate aftermath; corporate earnings were so badly battered that many companies were forced to lower dividend payments, and falling stock prices deprived investors of capital gains. Because wages tend to be less volatile than corporate earnings or investment income, labor's piece national income fell less than the decline in the overall total.
So, what are the reasons for decline? In the U.S., decreased union membership may be part of the puzzle. With just a little more than 11 percent of the labor force belonging to unions, compared with about 35 percent in the private sector in the mid-1950s, workers' ability to lay claim to a larger chunk of corporate profits has been blunted.
Still, this probably accounts for only a small portion of the decline and doesn't explain why labor's income share has also fallen in Europe, where almost a quarter of the work force is organized, and unions retain much greater political clout than in the U.S.
Globalization and technology certainly also play a crucial role in the shift. Then again, technological innovations and falling trade barriers have been a boon to the economic growth that has created millions of jobs and lifted incomes worldwide.
Perhaps the most intriguing explanation might be the global decline in the cost of capital, which made so many of the technological advances possible in the first place. According to University of Chicago economists Loukas Karabarbounis and Brent Neiman, this is the source of as much as half of the loss in labor's income share during the past 3 ½ decades. With capital becoming steadily cheaper since the early 1980s -- think back to 1981 and the Federal Reserve's 20 percent overnight lending rate -- the substitution of one production input for another is hardly surprising. If anything, the Federal Reserve and the low-interest rate policies needed to prevent the recession from becoming something worse may have contributed to this by shifting the cost balance between labor and capital.
One of the oft-cited remedies for slowing or reversing the decline is to increase the U.S. minimum wage, now at $7.25 an hour. Adjusting for inflation to bring the wage back to the $1.60 paid in 1968, the rate today would have to be $10.74.
Such an increase would, indeed, raise labor's share in the short run, but not necessarily in the long run, according to the OECD. Why? Because making labor more expensive relative to capital may lead companies to invest more in automation than they otherwise would, placing labor at a further disadvantage.
Other potential remedies -- increased investment in education, redistributive tax regimes, a broader social safety net -- also aren't particularly satisfying. Then again, maybe if the day comes when the economy returns to historical growth rates and the Fed can abandon zero interest rates, the workers of the world may not be at such a competitive disadvantage versus capital.
(James Greiff is a Bloomberg View editorial board member. Follow him on Twitter.)