The GDP of a country reflects, among other things, the total payments to all factors of production. For a long time, the share of payments to labour* relative to total payments to all factors of production was relatively stable. In recent decades, the share of payments to labour has been trending down in many countries, which FRED can help us illustrate.
The first graph shows that the share of labour compensation in GDP has been declining for several countries around the world. In the U.S., this share has declined by 5% between 1975 and 2017. The decline in other countries is even greater, with the largest occurring in Canada, at almost 11%.
Researchers Karabarbounis and Neiman recently argued that there’s an association between the declining labour share and the declining price of capital goods, such as equipment. They show that, if the elasticity of substitution between capital and labour is larger than one (that is, if it’s easy to switch from labour to capital), then a decline in the price of capital will increase the use of capital in production—thus, increasing capital’s income share. This move away from labour has led to the decline of its global share of income. The authors estimate that the declining price of investment goods can explain nearly half of the decline in global labour share.
And, right on cue, the graph below shows this decline in the price of investment goods relative to the price of consumption in the U.S. Between 1947 and 2016, the relative price of investment goods fell by almost 78%. This decline in relative prices could be the result of several factors, such as a reduction of trade barriers that facilitated the exchange of capital goods across borders and technological improvements that led to greater efficiency in the production of those capital goods.
How these graphs were created: For the first graph, search for and select the series “Share of Labour Compensation in GDP at Current National Prices for United States” and click “Add to Graph.” Then, in the “Edit Graph” menu, under the “Add Line” tab, search for and select the series “Share of Labour Compensation in GDP at Current National Prices for Germany” (and then do the same for Canada, Japan, and France) and click “Add data series.” For the second graph, just search for and select “Relative Price of Investment Goods” and click “Add to Graph.”
* In deference to the University of Groningen, one of the sources of the data, we use their preferred, British spelling of labour.
Suggested by Asha Bharadwaj and Maximiliano Dvorkin.