As increased political attention focuses on the state of the American worker, expect to see a resurgence of the argument that the labor share of income is in decline. The problem with the argument is that it ignores that some categories counted as income in national accounting statistics don’t actually end up in the pockets of workers or capital owners. Removing the categories of income that are not actually income reveals that labor and capital shares are well within their historical range.
If the goal of measuring income shares is to reach conclusions about people’s welfare, then the appropriate measure is one that captures the amount of output available for current consumption or to invest in expanding future production. Though a statistic called “gross domestic income” or GDI is often cited for this purpose, it is unfortunately not a good fit. That is because some of what is counted in GDI does not actually end up in people’s pocketbooks.
For instance, depreciation is income set aside to replace worn down assets. Replacing worn down assets simply returns the economy back to its previous level of production, but GDI counts it as a type of capital income. Instead, it should be netted out if we are trying to measure the income people can actually consume. Likewise, though smaller in scale, some types of taxes are incurred during the production process, but it is not clear whether labor or capital pays for them. Rather than counting them as capital income, they should be netted out, too.
Excluding both categories lets us look specifically at the capital and labor income earned on net by people in the United States.
The chart below shows labor and capital shares of net income from 1929 through Q2 2023, indicating that labor and capital shares are now remarkably close to their long-run averages. The average labor share from 1929 through Q2 2023 was 69.9 percent and the average capital share was 30.1 percent. In 2022, the most recent complete year of data, the labor share was 69.0 percent and the capital share was 31.0 percent—well within historical range and far from a supposed decades-long decline in labor share.
Net labor share includes wages and salaries as well as supplements to wages and salaries like health insurance and contributions for government social insurance. Together, they comprise labor income. Supplements to wages and salaries, or non-wage benefits, comprise a growing share of labor compensation, largely due to policy choices such as exempting employer-provided health insurance from income tax and contributions to entitlement programs.
Net capital share includes proprietor’s income, corporate profits, interest income, miscellaneous business payments, and housing income. Proprietor’s income represents both capital and labor income as owners are compensated for work and investment in their businesses. Because the split is hard to determine, it is all counted as capital income. It does not include depreciation or taxes on production less subsidies.
In conclusion, multiple studies find the shares of net income going to labor and capital have not changed substantially over more than 90 years. Both shares are well within their historical range, and recent changes are primarily driven by factors like exclusions for employer-provided health insurance and the returns to owner-occupied housing. Policymakers should remember that capital and labor are the main inputs to production, and they are complementary—more capital increases labor productivity, and more labor increases the return to capital. Ultimately, concerns over inequality should focus on differences within labor compensation rather than the split between labor and capital.
I agree that concerns over inequality should focus on differences within labor compensation rather than the split between labor and capital. It’s important to address disparities within the workforce.
I’m glad to see that the labor and capital shares of income are within their historical range. It’s important to consider all the factors when measuring income, and this post does a good job of explaining that.
I didn’t realize that non-wage benefits make up a growing share of labor compensation. It makes sense why it’s important to consider them when looking at the labor share of income.
Thank you for your comment! I agree, it’s important to consider non-wage benefits when examining the labor share of income. It’s one factor that contributes to the overall picture of workers’ compensation.
Well, if I can’t actually put the depreciation income in my pocket, can I at least use it to buy a new car? 😄
While the depreciation income may not be directly available for personal use, its inclusion in the national accounting statistics can distort the measurement of income shares. By excluding it, we can gain a more accurate understanding of the income available for consumption or investment.
I never realized that not all categories counted as income actually end up in people’s pockets. It’s interesting to see how removing those categories affects the labor and capital shares.
I’m glad to hear that the labor and capital shares are still in their historical range. I was worried they might have gone off on a wild adventure! 🚀
Who knew that the real inequality is not between labor and capital, but within labor compensation? The plot thickens! 🤔💼
Thanks for your comment! It’s true that the real inequality lies within labor compensation, rather than between labor and capital. The focus should be on addressing disparities within the workforce.
So, if depreciation and certain taxes are excluded, the labor and capital shares remain within their historical range. That’s good to know, but I wonder how policymakers take this into account when making decisions.
It’s interesting to see that concerns over inequality should focus on differences within labor compensation rather than the split between labor and capital. I guess it’s important to look at the bigger picture.
So, as long as I have enough capital to increase my labor productivity, I’ll be swimming in money? Time to invest in some supercharged pencils! 💪💼
Wow, this is a really detailed analysis of labor and capital income shares! It’s interesting to see that the argument about the decline in labor share of income might not be as straightforward as it seems. Thanks for sharing this perspective!
Wow, this is quite a detailed analysis of labor and capital income! It’s interesting to see how certain categories of income can skew the numbers. Definitely something to consider when looking at the overall picture. Thanks for sharing!
The chart provided is really helpful in visualizing the labor and capital shares of income over time. It’s reassuring to see that they haven’t changed substantially in the past 90 years.
Thanks for your comment! I agree that the chart is helpful in visualizing the labor and capital shares of income over time. It’s important to consider all factors when analyzing these shares and their impact on people’s welfare.
I never thought taxes could be so confusing. Do they make labor and capital play rock-paper-scissors to decide who pays? 🤔
Wow, this is a really detailed analysis of labor and capital shares of income. It’s interesting to see that they haven’t changed significantly over the years. I never thought about how exclusions for health insurance and returns to housing could impact these shares. Thanks for sharing!
It makes sense to exclude categories of income that don’t actually end up in people’s pockets. This helps us get a more accurate understanding of the income available for consumption or investment.
I totally agree with you! It’s important to exclude categories of income that don’t actually end up in people’s pockets when analyzing income shares. It gives us a more accurate understanding of what people can actually consume or invest. Great point!