According to Krueger (1990), the labor share attempts to measure the fraction of national income incurred on labor. In simple terms, while calculating labor share, the unadjusted labor share is expressed as a ratio of total compensation of wages and salaries before taxes deduction and the social contributions of the employer over income aggregate or national product. The denominator can be measured in terms of gross domestic product (GDP) or gross national income (GNI).
Another approach of measuring labor’s share as suggested by Gomme and Rupert (2004) that is used by the Bureau of labor statistics methodology. This approach expresses labor share as the labor compensation over the value added. Labor compensation includes the employees' compensation, government wages and salaries, private compensation, farm compensation, the housing of employees, and imputed labor compensation of self-employed. Value-added conforms to all those sectors included in computing labor compensation.
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Labor’s share = Labor Compensation/Value Added
How did you compute the labor share?
The data presented in the excel spreadsheet have been used to calculate Labor Share using Krueger (1990) and Gomme and Rupert (2004) suggested approaches and plot the chart below.
What kind of problems complicates the computation of the labor income share?
Labor income share computations involve a number of complications that make the whole process difficult. For instance, measuring value added is a problem in some sectors such as public administration where it is added in National Account which is the sum of labor costs. As a result, the analysis focuses on the corporate sector. Also, making the adjustment without affecting the level of labor share becomes difficult. It becomes more difficult when interpreting unadjusted and adjusted labor shares.
Does the labor income share, computed through both approaches, appear to display any specific tendency such as an increase or a decrease?
Both approaches appear to be consistent in terms of growth. However, the approach of labor income share suggested by Krueger (1990) is growing at a higher rate compared to the methodology bureau of labor statistics. As portrayed by both graph curves, the labor income share is increasing as the years’ progress.
If so, why should we care if the labor share increases or decreases?
Increase in labor income share should a public as well as economic concern. This is because growth in labor share may be contributed by the difference between productivity and real wages as measured using a common deflator. In fact, if the wages diverge or increase, the aggregate growth becomes faster and it is likely that the labor share will increase. Although labor shares affect the personal distribution of income, it also affects macroeconomic aggregates.
What could be the reasons behind the increase or decrease?
Basically, labor productivity growth is associated with an increase in labor shares. Better labor relations have been the peak of labor share partly caused by powerful unions. However, during this period, there were also many days lost due to industrial unrest – an unproductive situation for the economy. Lastly, increased competitive pressures from other parts of the world, firms are more willing and able to outsource labor and increase their level of production.
