South-Western College Publishing - Economics  
Labor's Shrinking Slice of the Pie
Topic Productivity and Growth
Key Words Economic Growth and Wages
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Reference ID: A152817584

News Story According to the United States Bureau of Economic Analysis, labor's slice of the economic pie amounts to about 56.5 percent of gross domestic product (GDP). The BEA's measure includes wages, health insurance and pension benefits. Over the last five years, labor's share of GDP has declined 2.5 percentage points to its current level.

The recent declines are not atypical. Historically, economists have seen periods of a rising share of GDP going to workers, but the overall trend since the 1970's has been downward in most industrialized countries. Economists are a bit perplexed by the long erosion in labor's share of the pie. "It's a bit of a mystery why the labor share is falling so much," said Alan B. Krueger, a professor of economics at Princeton.

Some important forces causing the erosion have been identified. To begin with, the changes in the composition of the American economy have contributed to the slide. In 1975, the finance sector accounted for only 18 percent of total output, while manufacturing accounted foe 28 percent. By 1995 the relative share of each of these sectors had basically flipped: The finance sector accounted for 21 percent while manufacturing slid to only 22 percent. This compositional shift took a chunk out of the workers' share because banks and financial companies use fewer workers to perform their work but do not pay their workers proportionately more money.

Other sources of the decline in labor's share of GDP include cheap imports form China and cheap call centers in India and other countries, which have increased competition for jobs and seen many employment opportunities go to these other countries. Middle-income workers have been replaced as new technologies do their jobs more efficiently with less labor. Finally, immigration is on the rise, which tends to produce more competition in the job market and keep wages lower. Finally, labor unions have lost much of their bargaining power resulting in lower wages. Most economists agree that all these factors together are eating away at the worker's share of the American pie.

"The decline in the wage share is bound to level off," said David Grubb, a labor economist at the Organization for Economic Cooperation and Development (OECD), based in Paris. But for the workers themselves, the most important question is, when will their slice stop shrinking?

Questions
Discussion Questions:
1. Visit http://en.wikipedia.org/wiki/Gross_domestic_product and scroll down to "The GDP Income Account." Besides labor's share (compensation of employees), identify and define the other two components statisticians use to come up with GDP by the income approach. What is the other approach for calculating GDP?
2. Define and discuss the concept of economic growth.
Multiple Choice/True False Questions:
1. Real economic growth refers to a measure of the output of the economy adjusted for the effect of inflation.
  1. True.
  2. False.
2. The loss of bargaining power by labor unions has contributed to the decline of labor's share of GDP.
  1. True.
  2. False.
Source Eduardo Porter, "After Years of Growth, What about Workers' Share?" The New York Times Online, October 15, 2006.
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