The declining labor share

Date posted: October 11, 2013

Statistics show the share of income earned by companies being paid to workers has been declining for several decades. What’s going on? Is it just that companies don’t have to pay workers as much as they use to? N.C. State University economist Mike Walden responds.

“I think it’s a little more complex than that. I mean at one level you have to think that companies look at workers as an input to help them make whatever they’re making. But also there are inputs from technology. There are inputs from machinery and the mix that a company might use over time. The mix of workers, technology and machinery may change due to many things.

“One thing we have seen over the last couple of decades is that the cost or the price of technology and machinery has actually gone down relative to the cost of labor. One issue related to labor is the benefits, particularly health care costs. So some economists who have done empirical analysis find that this is a major reason for this declining labor share, simply that businesses are using more technology and more machinery.

“Now very interestingly, we think of our country, and we do see this phenomenon in our country, the declining labor share. Actually, if you look around the world, we’re seeing the same thing. We’re seeing it in China. We’re seeing it in Europe. We’re seeing it in the Middle East. So I think something universal is going on that is actually making businesses think twice about hiring more workers.”

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