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Why Has Labor's Share Of GDP Declined For 40 Years?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
This long-term erosion of earned income and household finances does not enable "growth" that is based on rising spending and borrowing.
Why Has Labor's Share of Gross Domestic Product (GDP) been declining for 40 Years? The question cuts right to the heart of the core socio-economic issues of our era: the decline of secure work and the explosive rise of wealth and income inequality.

(chart courtesy of mdbriefing.com)
Over time, economic trends typically reflect macro conditions such as productivity, cost of energy, percentage of the adult population in the work force, etc.
For example: when oil shoots up in price, recessions follow. This is an obvious and well-supported correlation: when households have to spend more income on fuel, they have less to spend on other stuff, and that decline in spending pushes the economy into recession.
But labor's declining share of GDP hasn't reversed course as macro conditions change; labor's share keeps dropping, with brief periods of gains that quickly melt back to the downward-sloping trend line.
Other than the brief 5-year dot-com boom of 1995-2000, labor's share of GDP has dropped for four decades, through recessions and booms alike.
Why does this matter? If wages and salaries--earned income--is a steadily decreasing share of the entire economy, this means household earned income is eroding even when the economy is expanding.
And this is precisely what we see now: household income actually declined 8.5% since 2000 when adjusted for inflation.
How can households pay rising taxes, borrow more money and spend more to support a consumer economy on an income that's shrinking even when the economy is expanding?
Answer: they can't. "Something's gotta give": they can't pay higher taxes, borrow more money (and incur more monthly payments) and spend more on goods and services when their incomes are stagnating. It simply isn't possible.
Interestingly, labor's share of GDP only rose in the brief periods when labor was in strong demand:
1. in the late 1960s "guns and butter" era of Vietnam era military spending and new social-welfare programs
2. in the dot-com era, when building out the Internet created tens of thousands of high-paying jobs
3. in the housing booms of the late 1970s, the late 1980s and the subprime bubble of 2006-2008
In each of these housing-booms, the spike up was muted and short-lived.
The decline in labor's share of GDP in the stagflationary 1970s makes sense--in a long recession-prone environment, businesses will hire fewer people and suppress wage increases.
But what about the booming 1980s, when financialization, housing and the first wave of personal computing all took off? Why would wages/salaries' share of a booming GDP drop so precipitously?
The early 1990s, a time of post-Cold War/post-USSR good feelings, was generally prosperous, as the spike in oil prices from the First Gulf War was short-lived.
That was followed by the once-in-a-century dot-com bubble, which seemed to break the down-trend in labor's share of GDP.
But the dot-com bust phase wiped out all the gains and then some. The subprime housing boom triggered a short-lived, relatively muted rally that reversed as wages/salaries' share of GDP plummeted to new lows in the 2009 recession.
So what factors have persisted through all these changing trends? Two possibilities are:
1. technology that boosts productivity (and thus profits if wages are kept in line) has been steadily becoming cheaper and more powerful.
2. an enduring surplus of low-productivity, low-profitability labor.
As every clock-cycle in CPUs (central processing units) and every byte of memory became cheaper, replacing human labor with automation became increasingly affordable.
As the working-age population expanded (for two reasons--the Baby Boom and women entering the workforce en masse), a surplus of low-productivity labor developed beneath the surface of apparently prosperous eras.
In recessionary eras, job cuts slashed labor's share of GDP but when the economy came back, many of the low-skill, low productivity jobs did not: they'd been automated to lower costs.
These trends kicked into high gear when globalization (i.e. offshore competition and global supply chains) gutted U.S. industries in the 1970s (competition from Japan and South Korea) and again in the 1990s-2000s as competition from China and other emerging economies pressured U.S. corporate costs and profits.
If these factors continue to play out--and I see no reason they won't--we can expect labor's share of GDP to continue its slide as human labor is automated in a highly globalized economy.
This long-term erosion of earned income and household finances does not enable "growth" that is based on rising spending and borrowing. If these are no longer possible, the status quo has no Plan B.
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Or, we went off the gold standard in 1971.
Yes it is that simple
Duh. How about free trade? I am sure more stuff is made worldwide now than there was in 1960. As a percentage, Labor ( meaning western union based manufacturing ) has been outsourced to the non union east for pennies on the dollar of labor expenses. Sure, devauling of foreign currencys vs the Dollar also makes foreign manufactured goods more attractive, but the labor cost differential is what has driven blue collar jobs offshore.
"Interestingly, labor's share of GDP only rose in the brief periods when labor was in strong demand:
[snip]
2. in the dot-com era, when building out the Internet created tens of thousands of high-paying jobs"
These were the modern economy "good paying jobs at high wages." The government got together with the high tech firms and launched the H1B visa program and other visa programs. They destroyed that market for American workers and took a giant step towards income inequality.
This destruction has NEVER been adequately discussed never mind reversed.
It's clear that even if the American worker is treated fairly by the free market (an unusual event), the government will launch a full frontal attack on the American worker.
The gold standard would cause its set of problems. However it would resolve this issue. Gold standard is a somewhat closed money system which would require wealth distribution to be within similar deviation to operate.
But if anyone is asking why labor share of GDP dropped there is an easy answer for that. We use ever increasing amount of additional energy to create new products. When a fletcher used to make a bow, he used his labour (energy + skill) to produce it. Nowdays a fletcher is a factory which uses more fossil fuel energy to produce many more bows with fewer workers (maybe arms industry would be a better comparison). The energy going into the same number of bows may be similar or higher, but the construction time is greatly reduced. Yet a labourer will be paying tax for his labour produced, but there is very little tax on energy or the capital good (machines) producing it.
Hence this is a result of not recognizing or intentionaly ignoring the inputs and outputs of production. To make this right, we need to either tax all energy going into the product or tax the means of production or both. Taxing production means lowering it, but taxing the the owners wealth would cause a chase in the most efficient form of production. If taxed money is distributed to the people equaly this would cause an increase in aggregate demand requiring further production increases.
You mr. outlaw have hit on the answer to continue the destruction of our economy and indeed the whole nation. More taxes on successful means of production to reduce inovation and lower productivity will be the death knell of the whole system. Like your marxism do you?
I do like marxism as a critiqe of capitalism, no more. I am not saying more taxes, I am saying switch taxes. Taxing income slows down an economy as labour becomes expansive. Taxing wealth on the other side does not. It creates a run for ever depleting wealth. It creates limits in the size of the TBTF. It allows anyyone to own as much as they produce.
What part of "Greed is good" don't you understand? ;>)
Actually, thyat's just so 1980's. The proper phrase now is "Greed is God".
you seem to not even consider whether there is any moral basis for taxation.
for an armed gang to demand that someone turn over their money, under implicit threat of violence, is not how a civilized society operates.
i cannot take seriously, nor consider to be anything other than a troll or a brainwashed plebe, someone who supports banditry.
Please give me an example of a "civilized society" that does not tax citizens to pay for what is construed as the "common good".
it's called everyday life.
in my interactions with other people every day, i do not demand that other people hand over their wealth to me because i have a gun.
all my interactions with other people are voluntary, we freely exchange goods and services because we both find benefit in the exchange.
just look around you.
I didn't ask about everyday life.
You did not provide an answer because one does not exist, and never has. If you want to be a part of a group, you are expected to contribute. Even Hunter/Gatherers had a division of labor, and if you wanted to eat, you did your share. Pretty simple concept that most people with an IQ over 80 understand.
No one really likes paying taxes, and the devil is always in the details of how that money is raised and spent, but raised and spent it will be.
i did indeed provide an anwer, and you stubbornly refuse to hear the answer.
the state can and should be done away with.
most people with an iq over 80 also understand the concept that people can come to agreements, and can share expenses and division of labor voluntarily, it does not require implicit threats to achieve those goals.
The moral basis for taxation is simple (theorywise). It is a social contract between the state (the elders) and the individual signed at birth. It protects you (to a certain degree) from crimes against you and your property. Many other things as well. And this is why you pay your part of protection money to the state. I would agree with the term banditry for that, becuase it is a racket. But without that racket you would have nothing. Canada might decide to swing by US and take some land and oil for themselves, while fighting a few thousand rednecks armed to the teeth. They might decide that savages in US should pay extra tax while living in the Great Comonwealth of Canada. Or your local racketeer could take all you own, and you only have 1 gun while he has 10.
Hence the money has to come from somewhere to cover protection. The fact that it comes from income is what pisses me off, because your social contract does not stipulate that you are guaranteed to have an income. It only guarantees that your private property is protected. If so, the owner of the private property should be paying a tax for what he owns, not for how much he can earn.
there is no "social contract". do you understand what the word "contract" means? in order for there to be a contract, there must be an actual agreement between 2 or more parties. i have not come to any such agreement, so for someone to force their system on me, it would be dishonest to call that a contract.
you wrote: "And this is why you pay your part of protection money to the state."
wrong, wrong, wrong! we pay extortion fees to the state because they have a monopoly on violence, they have men with guns to back them up, and we have no chance to defend ourselves against them.
to say that only the state can provide for defence is simply not true. free individuals can agree to support a common defence, and can do so much more efficiently than the state. i would be happy to voluntarily pay for defence and local security and have the state completely go away.
Are you of voting age yet?
there is no age at which it's ok to vote in rigged elections, to give the illusion of consent in a system that is forced on us by violence.
as lysander spooner put it:
"a man is no less a slave because he is allowed to choose a new master once every few years"
'Cause the work ain't home anymore, people migrated to America for work, and now the work migrated from America ...
Debt Slaves
When the debt slaves (working people) figure out that they've been cleverly tongue-tied by identity politics and political correctness to divide them from one another the backlash will likely be horrific. That's been the history. Communism as an ideology was never a fit because it simply doesn't conform with human nature. A man doesn't want some multi-volume, awkward ideology; he wants livable, meanigful work in which he can earn his keep, care for his family and pursue his interests. We all have a bit of scoundrel in us and if any wisdom has been culled from the ages (say in a Constitution and Bill of Rights) is that it's unwise to formalize, organize and encourage police-state sponsored scoundrelism.
I wonder who the down arrow troll is charging right out of the gate on this article. Someone seems to be fiercely anti-labor.
GDP includes government spending. If that chart included government spending as a percentage of GDP, we would see it rise as labor's share of GDP falls.
Labor is valued in $.
$ loses value.
Labor loses value.
On the bright side we can now conjure as many joobucks as needed to pay for bankers' needs. No more do they need to skim them on an individual basis.
pods
Also, doubling the labor force with "women's liberation" halved the unit value of labor. Add to that the unfettered immigration and off-shoring of manufacturing and one has a recipe for grotesque wealth accumulation by the very, very, very few.
Yes....on the immigration front, at LEAST 12 million ILLEGALS, plus the legals.
And the only reason we have allowed this is to satisfy the business demand for low-wage labor to keep wages suppressed. All it would take to stop it is a valid I.D. check at the employer level combined with real punishment for cheating. We really don't have to have a fence all the way across the Southern border. Beef up the primary crossing areas and enforce the rules at the employer level. Then their would be a certain amount of self-deportation, and way fewer illegals crossing to begin with.
Oh yes, and get rid of the anchor baby shield, too.
The "growth economy" had one last resource to strip-mine; the US middle-class.
And it's gone.
The vampire class is running around now looking for another blood supply.
Sit back and await the dawn....
$17.5 Trillion in retirement assets. They are coming for it. It's the last big wad of money left, and they can't stand not sticking their greasy ham-fists into it. They will scheme and collude and try to justify it every step of the way.
We are living in an empire in decline, and a dying empire will try to lay its hands on everything it can.
yes, exactly.
it's called myRA, recently introduced by obama. after the next big stock market crash, there will be a new law mandating that some percentage, or all, of individual retirement accounts (IRA, roth, etc) must be held in "safe, secure" us governement treasuries. to "protect" the public from volatile, unsafe, market conditions, and to keep their savings nice and safe in us treasuries.
doesn't matter that the return on those treasuries in this ZIRP environment won't even keep up with inflation - and, hey, you'll be doing your patriotic duty and bankrolling your bankrupt uncle scam, to keep the ponzi going just a little bit longer.
https://myra.gov/
"myRA is a simple, safe and affordable retirement account created by the United States Department of the Treasury for the millions of Americans who face barriers to saving for retirement."
One great reason is no fiscal policy due to special-interest-bought distribution of congressional seats causing gridlock and Congressional dysfunction. Both Senate and House exacerbated by Citizens United. Leaves only Banks/Wall Street/1%-serving Federal Reserve to conduct economic policy.
you forgot racial integration and affirmative action and mass immigration as a source of surplus labor, ya politically correct toadie
1965-- Senator Edward "River Guide" Kennedy:
“Out of deference to the critics, I want to comment on … what the bill will not do. First, our cities will not be flooded with a million immigrants annually. Under the proposed bill, the present level of immigration remains substantially the same … Secondly, the ethnic mix of this country will not be upset … Contrary to the charges in some quarters, S.500 will not inundate America with immigrants from any one country or area, or the most populated and economically deprived nations of Africa and Asia. In the final analysis, the ethnic pattern of immigration under the proposed measure is not expected to change as sharply as the critics seem to think. Thirdly, the bill will not permit the entry of subversive persons, criminals, illiterates, or those with contagious disease or serious mental illness. As I noted a moment ago, no immigrant visa will be issued to a person who is likely to become a public charge … the charges I have mentioned are highly emotional, irrational, and with little foundation in fact. They are out of line with the obligations of responsible citizenship. They breed hate of our heritage.”(Senate Part 1, Book 1, pp. 1-3)
"River Guide"...
Bravissimo.
m
It's called inflation, dumbass.
It's not 2% you fucking moron.
Yep, if 1980 standards will still used to measure inflation, we'd be at 8% or so. And much higher if not for drop in oil.
Even if they're using the bullshit CPI figures, inflation still doesn't account for the entire loss. I think the spirit of the article is maintained. Why aren't wages keeping up with inflation? Say 2% printed figure for inflation is vs. 8% actual. The spread would certainly show up in this wages vs. GDP % but it wouldn't tell the whole story.
You're certainly right, but other factors need to be considered.
Because production is getting more and more automated and the economy becoming increasingly capital intensive. If you have an assembly line job it will soon be replaced by a robot. If you have some menial office job it will be replaced by a computer.
agent default:
"Because production is getting more and more automated [...]"
My comments:
That´s true. Unfortunately, even some intelligent(?) people don´t understand that. Or pretend not to understand that. If robots and computers can do work humans previously did, the demand for labour decreases which pushes down wages and salaries.
Excessive supply of labour also matters.
Offshoring production also decreases the demand for labour and pushes down wages and salaries.
Of course, employers can pay the remaining workforce more as production becomes more efficient and the labour cost share of the total cost decreases, ceteris paribus. But that is only true as regards the remaining employees.
I know that some people argue that redundant labour can find new well paid jobs if they try hard enough and the government doesn´t interfere in the markets. But they don´t even try to briefly outline how that would work in the real world. And that´s because they can´t think of something that can provide an assembly line worker or a butcher with a new well-paid job. I also think that their theories would match the reality better if people had saved more and invested that money in companies that could benefit from more automated production of goods and services. Thereby, income from work could have been replaced with capital income. To some extent that has already happened over the past 50 years since the lower classes indirectly have become stock owners through pension funds. The problem is that the general public has not increased their total savings to the extent they should have over the past 50 years. Perhaps lower capital gains taxes and no death tax in the past could have encouraged people to save more. There are probably other means that could have been used for increasing the future capital incomes for the general public.
(By the way, the Zerohedge web site seems to have a problem which seems hard to handle for at least Internet Explorer 11 with standard settings. It may also be a server problem. In any case, the Zerohedge web site has crashed very frequently for me over the past few weeks.)
Switch Browsers and use ad block.
Now, "Perhaps lower capital gains taxes and no death tax in the past could have encouraged people to save more."
Really? How many people in the class called "Labor" have to worry about inheritance taxes, estate taxes, or Capital gains? Maybe one in 10 million?
Estate Taxes are Federal, and don't kick in until the value of the estate is over $1Million...affecting less than 2% of all taxpayers. Inheritance taxes are applied in only 8 states, and again, the number of people affected are quite small and the thresholds are high.
Capital gains worries.....hahaha....labor should be so lucky.
Methinks you have some kind of abstract, textbook understanding of labor...Ivy League?
In the mid-1970s, the death tax was a problem even for small business owners, farmers and the upper middle classes in the US since the amount exempted from tax was only about $350,000, adjusted for inflation.
As regards capital gains tax, the maximum rate was about 40 %. The rate was 25 % for long-term capital gains up to $50,000 (about $250,000 today).
But it seems as if Americans began to save less when the tax rates were lowered.
In Sweden, high inheritance and capital gains taxes and low household savings figures were compensated by big public pension funds (which were looted, however, about 15 years ago). But the Swedes should also have saved more.
In the 1970s, before the meatpackers could hire non-unionzed Mexican immigrants on a large scale, an American butcher could lead a middle-class life similar to the auto workers organized by the UAW. In those days, working-class Americans could save substantial amounts of money. Today, that´s not the case because of automation and excessive supply of labour.
(I´m not an American and I have never visited the US. I´m Swedish and even call myself CTG_Sweden. My spelling is usually British and I guess that the fact that English is not my native language shows occasionally.)
I'm just leaving this comment here for my new serial junker. I love that you care so much. Here let me start the fun with my own down arrow.
I'll indulge you.
1965 immigration act - they used immigration to keep wages static so all the benefit from productivity advances since 1965 have gone into the pockets of the already wealthy.
Eventually this policy leads to economic stagnation as the ex middle class eventually ends up with no money to spend.
Fuck immigration, they shipped the whole factory to China.
off-shoring came later
If you account computers and machines as people, I bet the % returns to normal.
who needs labour when we have chinese slaves ?
In a value adding economy, labor is traded for money or can be directly traded for other labor or goods directly.
However, when labor ceases to be treated as sufficiently valuable relative to money, in a financial economy, then labor cannot be traded at a sufficient rate. One place that this is most clear is in the taxing by the government. No matter how hard one works, one cannot trade their labor directly for real estate taxes made due to the local government by the local emperor and as a result people can have their property stolen by the government through no fault of their own.
Taxes are not a social contract made by people. They are imposed by dictators who have no valuable labor to trade and so they are compelled to steal the fruits of the efforts of others to give to themselves, their cronies and projects. Does it mean that without taxes there would be no schools or highways? No, of course not.
When you are basically slaves working on the premises owned by the 1%, they can reduce your wages to subsistence levels.
i believe you mean below subsistence levels.
Maybe labor was grossly over valued in 1960-1980 time frame.
What is the % labor to GDP if you could extend the graph back to 1776?
Was it ever higher that 50% prior to this time frame?
Things do eventually revert to the mean - don't they?
But more likely - it is just another STUPID half ass article that tries to use salaries and wages instead of TOTAL COST of labor.
If you have hired and paid anyone in the last 25 years you would know that the benefit side of labor costs has grown at a VERY fast pace.
Redo the graph - using TOTAL labor cost instead of just wages and salaries and the numbers will look much different.
If you allow the government to force higher costs on business by mandating all sorts of restrictive shit - then expect wages to not grow as fast.
Compare 50% in 1970 with 43% in 2015 - just the massive increase in company paid health insurance has more than made up this change.
Now that the rich have robbed the middle class and pushed them into poverty, there's practically nothing left for them to loot in the U.S.
Perhaps the rich will now cannibalize each other. After all, there's no honor among thieves.
There is a fair amount yet. You can privatize primary public education, healthcare, SSI, public-primary partnerships for infrastructure funding, lots of publicly-owned assets, etc. It will be hard and challenging but it is still there.
Pepper is going to host the upcoming DNC debates for Hillary. Preprogrammed responses.
Pepper the robot: Intelligent robot, SoftBank | Aldebaran robot
You need little to no labor to commit fraud.
CHS often overthinks things.
This is massively uninformed. Unions in the US overshot in the 1960s, and have been backpedaling ever since. And they're also stuck in a 1920s mode of operation, external and internal. The only "recent" expansions have been due to government workers, which should not even be allowed, and service workers at minimum wage.
The results CHS refers to, concentrated wealth and peonage, are effects of low union and labor strength, not *causes* of it.
Why Has Labor's Share Of GDP Declined For 40 Years?
Because you are not counting the benefits and regulatory costs in your anylsis.
Redo the graph - use total labor cost instead of just wages & salaries - include health insurance, retirement benefits, social security costs paid by business and mandated leave and all the other restrictive stuff - and the share of GDP that is going to labor has most likely gone up rather than down.
Or at least show these costs as a % of GDP on their own graph. The results will change your whole view and you will be asking -
Why has labor's share of GDP increased for 40 years?
Plot government's contribution to GDP and it will be clear.
Just focus on one thing at this point:
When it all goes up, the western corporate model of shareholder and c-suite fat cat, WITHOUT mandated consideration of community and country of origin and location...MUST be eliminated.
That model is at least several hundred years old, and no longer works.
No matter what happens next, NEVER forget this.
m
Holy crap, this really isn't that hard people...
Productivity has become decoupled from actual time spent DOING a particular job. While productivity per hour has skyrocketed due to technology, that technology has NOT added a single minute to the wage hour.
Labor is forced to sell its TIME in those hourly increments. Since tech cannot give MORE time, the worker cannot get more money, except through knee-jerk minimum-wage increases, which just skew things even further.
Meanwhile, all that added productivity has gone to the top.
So of COURSE management is getting as rich as hell and labor is in the toilet.
But go ahead, come up with some overly-complex way of obfuscating the obvious...Add a little class-warfare, and mix well.
Because the Corporate-Fascist U.S. Government is anti-citizen, anti-middle class, anti-working- people, anti-equality, and racist and would rather produce mega-profits for the MIC through unprovoked foreign wars instead of taking care of things at home.
You need to look at the productivity gains along with how the wealth income in income is being divided up. It is due to several factors but the main one has been that organized private labor has been progressively losing clout and I'd argue lost the war after NAFTA was approved. Almost irrevelant today in federal politics and private organized labor is at levels not seen since early 20s.
Today the US is a face place where lots of people have trouble even getting in the door & face a tough time staying in corporate America over 50 since you are viewed as a cost asset.
This is just one symptom though of how sick the US economy is including the rate of business startup/failure, the inability of US to increasingly convert bench science to viable commerical firms in most verticals, its runaway services industry costs (education and healthcare), and our eroding infrastructure along with IP capital & property. US isn't the global brain drain it was even 20 years ago with people staying here after grad school.
The destruction of the middle class is going very well. The neofeudalists are laughing into their sleeves.
All according to their plans.
Welcome to the new serfdom, same as the old serfdom.
"but when the economy came back, many of the low-skill, low productivity jobs did not: they'd been automated to lower costs."
Agreed, but a couple of other factors. After the 1990 recession and the economy supposedly recovered in April of 1991, everyone I knew who had a job said that they were doing the work formerly done by three people. This is the time when the mumbo-jumbo corporate term calling for "multitasking" was propagandized throughout society. Automation might have been a factor, but companies simply were not restoring staffing levels.
Another thought is that the official economic dates of recovery mean nothing to the ordinary working person. My loss was so staggering by the 1990 recession, I didn't personally recover until December 1995 or four years and seven months after the official recovery date.