What do we know about the labor share and the profit share? Part III: Measures and Structural Factors

Abstract: Economic theory frequently assumes constant factor shares and often treats the topic as secondary. In this paper I show that this is a mistake by deriving the first high frequency measure of the U.S. labor share for the whole economy. I find that the labor share held remarkably steady indeed, but that the quasi-stability masks a sizable composition effect detrimental to labor. The wage component is falling fast and the stability is achieved by an increasing share of benefits and top incomes. Using NIPA and Piketty-Saez top income data, I estimate that the U.S. non top 1 % labor share has fallen 15 points since 1980. This amounts to a transfer of $1.8 trillion from labor to capital in 2012 alone and brings the U.S. labor share to its 1920s level. The trend is similar in Europe and Japan. The decrease is even larger when the CPI is used instead of the GDP deflator in the calculation of the labor share