Ineconomics, thewage share orlaborshare is the part ofnational income, or the income of a particulareconomic sector, allocated towages (labor). It is related to thecapital orprofit share, the part of income going tocapital,[1]which is also known as theK–Y ratio.[2]The labor share is a key indicator for thedistribution of income.[3]
The wage share iscountercyclical;[3]: 13 that is, it tends to fall whenoutput increases and rise when output decreases. Despite fluctuating over thebusiness cycle, the wage share was oncethought to be stable, whichKeynes described as "one of the most surprising, yet best-established facts in the whole range of economic statistics".[4]The wage share has declined in mostdeveloped countries since the 1980s.[5][6]
The wage share can be defined in various ways, butempirically it is usually defined astotal labor compensation or labor costs over nominalGDP orgross value added.[3]
Often the capital share and labor share are assumed to sum to 100%, so that each can be deduced from the other. For example, theBureau of Labor Statistics defines the labor share in a given sector (LS) as the ratio of labor compensation paid in that sector (C) to current dollar output (CU), i.e.LS = C / CU. The non-labor or capital share (NLS) is defined as 1 −LS.[7]
InCapital in the Twenty-First Century,Piketty described theaccounting identityα =r ×β as the 'first fundamental law of capitalism', whereα represents the capital share,r is the rate of return on capital, andβ is the capital to income ratio.[8]Piketty defined the wage share as 1 −α.[9]
Because theself-employed perform labor which is not rewarded withwages, the labor share may be underestimated in sectors with a high rate of self-employment. One approach is to assume the labor share of proprietors' income to be fixed.[10]The OECD and the Bureau of Labor Statistics adjust labor compensation by assuming that the self-employed have the same average wage as employees in the same sector.[3]: 2
The importance of the distribution of income between thefactors of production –capital,land andlabor – has long been recognized.Ricardo (1817) said that to determine the laws which regulate this distribution is the "principal problem inpolitical economy".[11]
Cobb and Douglas'sTheory of Production (1928) introduced empirically determined constantsα andβ which corresponded to the capital and labor share respectively. Cobb and Douglas found that the wage share was about 75% in 1928.[12]: 163 For most of the 20th century, constant labor share was astylized fact[3]: 14 known asBowley's law.
Historical measurements of the wage share can be charted using theFederal Reserve Bank of St. Louis'sFRED tool, which includes time series published by theBureau of Labor Statistics[13]andBureau of Economic Analysis.[14]
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