Labor’s “share” in a Garett Jones World

Timothy Taylor looks at an article on the secular decline in labor’s share of income, and he concludes

These explanations all have some plausibility, but it isn’t clear to me that, taken together, they adequately explain the fall of more than four percentage points in labor share in the decade or so from the early 2000s (roughly 61%) to the years right after the Great Recession (just above 56%). The labor share does show some sign of rebounding in the last couple of year, and it will be interesting to see whether that turns out to be true bounce-back or a damp squib.

“Labor’s share” is one of those macro-Marxist concepts that I distrust. It ignores the heterogeneity of labor. Some workers have few skills. Others have highly marketable skills. It ignores heterogeneity of capital. But perhaps even more important, it ignores the fact that most of us are Garett Jones workers, who do not produce output but instead produce organizational capital.

As an example of a firm with a high labor “share,” consider a 1990s dotcom, which has lots of dreams but little revenue. For many of the dotcom darlings, labor’s share was way over 100 percent, and hence they went bust. Those that survived are now living off the organizational capital that they developed back in the day, which could make for a low labor share today.

In some (many?) firms, the labor share is arbitrary. For example, my guess is that as of now the “labor share” at Google is low, because the organizational capital that it built up during its first decade of existence is very valuable relative to the necessary labor input to keep it running. But Google has a lot of leeway. The more it invests today in organizational capital (research into driverless cars and such), the higher will be its (current) labor’s share. The more it just sticks to its existing business and trims workers in the research areas, the lower will be its labor’s share.

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7 Responses to Labor’s “share” in a Garett Jones World

  1. collin says:

    While I tend to agree with this concerns of Labor-Share of the economy, I do believe this decline is effecting society.

    1) In terms of Trump victory over the elite, it includes his anti-trade and heavy anti-Immigration positions. It was HRC fault for Koch Brothers and GE outsourcing. So the hope is with WWC that Trump will pursue policies that increase the Rust Belt WWC wages.

    2) I believe this less labor-share, is effecting family formation. I hear lots of family breaking-up complaining but in reality divorce rates have declined the last 35 years. I think what Conservatives are upset about is young people are putting off marriage until 28 and having 1 or 2 children. (Outside of Utah the single parents are less in Blue states like MA, NY now.) And the USA is one of the higher birth rate compared to Europe and espeically East Asia. (Notice the European nation with the highest birth rate is France.) And for all the complaining about family formation, I don’t see anything concrete from conservatives to improve working class lives.

    3) I think there is something to ConorSen that this birth rate increase and increasing developing world wages, especially Mexico, is creating a labor shortage. I am not sure how this plays out but in California help wanted signs are everywhere and low wages are increasing without minimum wage.

    • collin says:

      In Keynesian terms, Globally long term we are seeing a huge drop in the Globe AS curve because the production of the babies is dropping like a rock.

    • asdf says:

      Low fertility is a function of the urban professional class having low TFR. Specifically, leftist professionals (conservative church going professionals have 2.0 TFR).

      Lower divorce rates are a predictable result of lower marriage and fertility rates. You can’t get divorced if you never marry. The professional class achieves low divorce rates in part by never taking a chance on marriage and children. That’s not an accomplishment.

      Fertility is dropping in many places but still higher then the west. Africa remains very high.

  2. Lord says:

    While true, this doesn’t make it unimportant. A low pressure economy will reduce employment and labor share relative to a high pressure economy and whether Google wants to build capital or sit on its laurels makes a big difference.

  3. Becky Hargrove says:

    Too much organizational capital is not yet aligned to create wealth via its own means, i.e. is dependent on preexisting wealth. Which is why prosperous regions are now limited and expensive to access. This is also a good approximate of limited labor share.

  4. steve says:

    You are focusing on individual laborers and firms. The question is why this decreased overall for all of labor. You blow by this because you don’t know or don’t want to answer it I suspect, or it is just easier to answer the questions you want to answer.

    Steve

  5. Blake says:

    I remember that you covered the Garret Jones view of output vs. org. cap in your latest book. Where would I find Garret Jones’ writing on this subject?

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