Profits, Wages, and Productivity in the Business Cycle: A Kaldorian Analysis

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Engelbert Stockhammer, Kahn, Meirelles, Marc Lavoie, Taylor, Sergio Cesaratto, Amit Bhaduri, Taylor, Lance, Blecker, Robert A, Discussion Papers. Blecker, Robert A. Riccardo Pariboni, Borazan, You can help correct errors and omissions. See general information about how to correct material in RePEc. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Elizabeth Dunn.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about. BLS implements the labor approach by multiplying nonfarm proprietor hours by nonfarm business employee compensation per hour; that is,.

These data include all hours worked by proprietors in a primary job or another job. The final component of the labor share estimation is output. As with the compensation data, BEA compiles output data from several sources, with the Census Bureau being the main one.


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For data that are not yet available, BEA uses alternative data sources to extrapolate forward into recent quarters. The gross value-added output series used in the labor share measure is consistent with the BLS labor productivity measure. Some researchers prefer to use net value-added output—gross value-added output less depreciation—when estimating the labor share, because deprecation can be thought of as the portion of final output that replaces the capital consumed in production and is not distributed to workers or owners as income.

If one is interested in the extent to which workers share in the output available for consumption, then net value-added output may be more appropriate. Gross value-added output is more appropriate if one is interested in the extent to which compensation tracks productivity. Finally, note that all output and compensation data used to calculate the labor share are in current dollars. Figure 1 shows the evolution of the labor share from through the third quarter of Although there is quite a bit of variability, we see that the labor share declined by about 2 percentage points from the beginning of the series to around the turn of the 21st century.

Since then, the labor share has declined more rapidly, dipping below 60 percent for the first time in and falling to a low of By the third quarter of , however, the labor share had increased to The slow and steady decline during the latter half of the 20th century—followed by the sharper decline over the 15 years since then—has increasingly been a focus of research.

In this regard, Karabarbounis and Neiman examined data from more than 50 countries and argue that the decline in the relative price of investment goods—in particular, computerized capital—has led firms to employ more capital and relatively less labor. Lawrence presents another possible explanation for the observed changes in the labor share. Although the capital-to-labor ratio has been generally increasing, when the ratio is adjusted for labor and capital augmenting technical change over time, the effective capital-to-labor ratio is seen to have actually been decreasing.

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The second possible cause is the assumption that the hourly compensation of proprietors is the same as that of employees. Elsby and his coauthors determined that about one-third of the observed decline in the labor share is due to this assumption. The solid dark-blue area depicts employee compensation as a share of output i. See the box that follows. The MFP series is available only at an annual frequency, from to the current year, for the private nonfarm business, private business, and manufacturing sectors.

Government enterprises are excluded from the MFP series because no satisfactory capital measures for this sector are available; specifically, a substantial portion of the capital income of these entities consists of subsidies. Note that there is a publication lag with the MFP series of about 16 months after the end of the reference year, because of a lag in the availability of the source data.

This delay makes the MFP series unsuitable for quarterly data releases. The MFP methodology for the labor approach is identical to the approach used in the labor productivity labor share measure. Capital income is equal to the productive capital stock multiplied by the rental rate of capital. The rental rate of capital is an opportunity cost concept that depends on the internal rate of return, the depreciation rate, taxes, and the rate of change in asset prices.

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All of these series are available or can be calculated, except for the internal rate of return. For the corporate sector, the internal rate of return is calculated by industry, with the use of data on capital income and the other components of the rental price. This approach is not possible for the noncorporate sector, because there are no data on capital income. Instead, capital income is estimated by assuming that the noncorporate rate of return on capital is the same as the corporate rate.

In the figure, the horizontal axis shows the eight quarters before the beginning of a recession and the eight quarters following the end of a recession. The quarter before the start of a recession is the expansionary peak, and the quarter after the recessionary trough the end of the recession is the start of a new expansion.

The number of quarters between the start and end of a recession varies across the six recessions depicted. As an example, consider the labor share surrounding the recession of November through March In the first quarter of , eight quarters before the start of that recession, the labor share was Beginning with that quarter, the labor share initially fell and then moved slowly upward, until it reached By the end of the recession the first quarter of , the labor share had fallen to In the expansion that followed, the labor share continued to trend mostly downward before recovering somewhat, to The average labor share eight quarters before the beginning of a recession was With the exception of the brief recession, the labor share has tended to decline after each of the last six recessions, decreasing by about 1.

Despite this shift, changes in the labor share before and after the most recent recession are similar to those observed in the previous five recessions. Figure 4 shows the average labor share the same as in figure 3 in the quarters leading up to and following the six most recent recessions, along with the two component series: average labor compensation and average output. The vertical axis on the right measures labor share, and the vertical axis on the left measures the labor compensation and output indexes, both scaled to equal in the first quarter of a recession.

The figure reveals that the labor compensation index grew faster, on average, than output before these recessions.

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During this pre-recessionary period, there is a general upward trend of about 1 percentage point in the labor share, but there is also substantial variability in that trend. By contrast, there appears to be no clear trend in the labor share during recessions, measured from the expansionary peak to the recessionary trough: the average change during the six most recent recessions was just —0. Still, in three of the recessions, the labor share changed by more than 1 percentage point: a decrease of 1.

Following recessions, a couple of factors act to exert downward pressure on wage and compensation growth. First, employers are not yet certain that economic activity is accelerating, so they are hesitant to increase wages. Second, recessions lead to higher levels of unemployment and, consequently, a large supply of available workers, making workers less likely to demand higher wages.

Therefore, after recessions, the output index tends to grow more quickly than labor compensation. The result is a drop in the labor share of about 1. Over the next five quarters, output and labor compensation grow at similar rates, leaving the labor share essentially unchanged. Typically, following a recession, the number of hours worked per employee increases as firms observe faster economic growth. Subsequently, employment rises, and as the surplus of labor diminishes, wages finally begin to increase, on average.

As previously noted, the labor share is one of two components that can contribute to a gap between real hourly compensation and labor productivity. The other contributor is the percentage-point difference between the deflator that BEA applies to nonfarm business output and the Consumer Price Index CPI —based deflator that BLS applies to the compensation component of its hourly compensation series; 29 that is,. From to , real hourly compensation increased at about the same rate as labor productivity, resulting in a relatively small 0.

See figure 5. Then, real hourly compensation began to lag further behind labor productivity during the s, and the gap has continued to widen. From the early s until the turn of the century, the difference in deflators accounted for virtually all of the gap between real hourly compensation and labor productivity. However, since , the decline in the labor share has contributed more than in any previous period.

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Over this year period, labor productivity has grown 1. As Robert Solow observed, examining movements in the labor share within component industries can shed light on the variation in the aggregate labor share. To estimate these contributions, we constructed measures of the labor share for the industries that make up the nonfarm business sector. BEA publishes data on the components of industry value-added output, including labor compensation, from through To be consistent with our earlier analysis, we restricted these data to the nonfarm business sector by subtracting industry-level nonprofit output from both output and compensation in industries for which BEA estimates data for nonprofits.

Note also that the BEA industry-level compensation data are employee-only data, so our analysis here addresses just the employee compensation portion of the decline in the labor share, not the proprietor-based portion.

Industry-level labor share values from to are shown in table 1. There were declines in the labor share in eight industries, increases in five industries, and no change in one. The largest percentage-point declines in the labor share were in mining from 37 percent to 22 percent and nondurable goods manufacturing from 49 percent to 34 percent.

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The largest increase was in other services except government , whose labor share grew from 39 percent to 44 percent. The aggregate labor share declined from Note that these shares are lower than the published labor share estimates for the nonfarm business sector; the disparity is due to several methodological differences between the industry series we used in our estimations for this article and the data used in constructing the published BLS major-sector series.

Declines in durable goods manufacturing and nondurable goods manufacturing were responsible for 2. Over the same period, several industries showed gains in their labor share—led by professional and business services, which contributed 2. To ascertain these two effects, we decomposed the change in the weighted average labor share from to in the following manner:. Change in weighted labor share. The three factors that determine the change in the weighted labor share are presented in table 2.

The change in the weighted labor share for each sector shown is in the first column. This term is shown in the second column of the table. This term appears in the third column of the table. The third term under the summation sign gives the interaction between the changes in the industry labor share and the changes in the output share.

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