The share of labor in national income is both over- and under-explained

NOT.IT IDEA The unfair distribution of looting in the modern economy is now part of public discourse in a prosperous world. One of the most common villains is the rising class of wealth owners who live on capital income rather than hard-earned wages. This is an explanation disseminated by Thomas Piketty in his 2013 book Capital in the Twenty-First Century. I get change with politicians. And studying the “labor share,” which is part of the national income that workers earn from wages, has become like cottage industry in economics.

A new article by Gene Grossman and Ezra Oberfield of Princeton University examines Google Scholar and finds that over the past decade more than 12,000 economic articles have been written, including the terms’ work share ‘and’ decline ”. I did. Their review of the study suggests that economists’ understanding of why workers bring home smaller slices of pie is ambiguous at best.

One of the reasons for this is the difficulty of measurement. According to official statistics, the labor share in the United States fell by around 6 to 8 percentage points between the 1980s and 2010. However, Grossman and Overfield list a few recent treaties that have called this number into question. For example, the 1986 revision of US tax laws reduced taxes on partnerships and other “flow-through companies” and skewed wage measures. After the tax cut, more and more business owners began to categorize themselves as middle-of-the-road businesses and income as profits, which resulted in a decline in measured wages.

Another distortion comes from calculating the labor share using gross national income rather than net measures that take into account depreciation of assets. The use of net indicators, which can give a better picture of the income that can be consumed, suggests that the decline in the labor share is small. Indeed, the growth of assets such as computers has caused the rate of depreciation to increase, reducing net income and national income over time. As a result, today’s labor share is increasing.

Grossman and Oberfield explained for another reason why the decline in the labor share was not well understood. The explanations of many economists are incompatible with each other. Researchers are looking at everything from automation and offshoring to increased focus on the business. They use sophisticated methods to estimate the role of specific factors and keep everything else constant. But when you add up the estimates, the resulting numbers are too large. Grossman and Oberfield believe the sum may be three to four times the amount of the actual labor share reduction.

Why is it so? The authors argue that the researchers are suggesting the cause closest to the decline rather than the root cause. Maybe many different factors can just be different ways of labeling the same thing. For example, advances in information technology have made it possible to automate many office jobs and strengthen the market power of some companies. Economists can tell each other a lot, and these stories can even enter public discourse. But the truth remains elusive. ■■

This article was published in the print version of the Finance and Economy section under the heading “Pie in the Sky”.

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