The falling labour share of income

We\’ve had the usual suspects over the past few months pointing to the falling share of labour income. That is, the portion of GDP which goes to labour is falling.

Clearly, this is terrible and shows that the bastard capitalists are just being too greedy.

Sadly, just another example of those usual suspect\’s ignorance of the numbers. One of the causes is actually this:

Barclays estimates that nearly 480,000 new businesses were created over the past year – a record – and said official statistics revealed that self-employment now stood at the highest level relative to the total working population for 75 years.


The latest official Labour Force Survey figures for October show a record 4,138,000 people were self-employed, up 4pc year on year. “It is the highest absolute number since records began,” said Dr Roberts.

For when we calculate the labour share of income we do not just look at wages and then assume that everything else is profits.

Actually (and from memory, so not in every detail) we have labour income, profits, employer paid taxes on labour (ie, employers\’ NI), subsidies, indirect taxes (like VAT) and \”mixed income\”.

If profits stayed static (which I do not claim they have over the decades) but employer NI rose then the labour share would fall. If subsidies rose, or VAT increased (which is most certainly has since the highest recorded labour share in the mid 70s, ie, when we introduced VAT) then the labour share would fall.

Which brings us to mixed income. It\’s always rather a problem in measuring the incomes of the selfemployed. It\’s actually a problem for the selfemployed and their advisors, let alone the statistical authorities. For some portion of their income is return from capital (they are running their own business and even the reputation is capital in a sense) and some portion is straight labour income. It\’s always rather difficult to unpick exactly what the portion is. So, we measure the incomes of the selfemployed as \”mixed income\”, not as part of either capital income (ie, profits) or labour income.

At the extreme, if we were all selfemployed then the labour share of income would be zero. At the not extreme, a rise in the number of selfemployed means a fall in the labour share of income.

We have a record number of selfemployed, we have a low labour share of income. Yes, the two are connected. No, I do not say that this is the entire cause: I do say it\’s some of it.

6 thoughts on “The falling labour share of income”

  1. Start the post telling everyone that “the usual suspects” are “ignorant of numbers”. Then perform no actual quantative analysis of the effect you outline.

    Then completely ignore the pretty crucial fact that real wages are actually falling, while GDP is not.

    Cover your ass rhetorically at the end by saying that the borderline negligible effect you outlined “isn’t the whole story”.

    Classic Worstall post.

  2. Then completely ignore the pretty crucial fact that real wages are actually falling, while GDP is not.

    As has been pointed out on here before, one explanation for that is the government tax take is increasing.

  3. Global economy forces labour cost down, no one in uk can compete with 2$ a day labour costs. China and the like are slowly taking most of the low skilled jobs and are working hard to take most of the others. Localism is no more.
    We need a reform of global financial system, it no longer works and is not fit for purpose.
    Political class, because of self interest, seem unable to implement the necessary reorganisation. There are too many people at the table.

  4. Global economy forces labour cost down,

    True enough.

    no one in uk can compete with 2$ a day labour costs.

    Err, no, of course you can compete. You either provide services that cannot be provided remotely – no matter how low skilled. You can’t stack shelves in the local supermarket from Shenzhen, or you provide niche or specialist labour that not even the Vietnamese will provide for $2 per day (whilst agreeing with you that this is a shifting battle ground.)

  5. The prices of everything–including respective shares to labor as wages and benefits and to owners as interest and profit (or loss)–are set by the behavior of consumers in buying (or not) and, in the main, are beyond the control of the capitalists themselves. Pay too little and you won’t get the required number of workers of the requisite skills, your production will languish (and unit costs soar), your business will decline in value, and (if you don’t change your ways to reflect consumer preference) fail or be bought by another more compliant with those wishes. If
    you overpay (whether for workers or anything else on which the business depends), likewise, you’ll lose money and (again, if you don’t change your ways) the business will be taken over by another (or others).

    Laws which inhibit the ability of producers to comply with desires of consumers are effective only temporarily; eventually, they only drive consumers to satisfy their desires elsewhere (as from foreign sources), a development requiring legislation aimed directly against preferences of consumers themselves: restrictions, prohibitive tariffs, foreign exchange controls, etc. The final step is war–between “have” and “have-not” nations (the latter being those comparatively overpopulated and thus dependent on export of their labor to buy foodstuff and raw materials).

    People don’t learn much and, by and large, tend even to forget what they’ve learned previously.

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