economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, the wage share or labor share is the part of

national income A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted nati ...

, or the income of a particular

economic sector One classical breakdown of economic activity distinguishes three sectors: * Primary: involves the retrieval and production of raw-material commodities, such as corn, coal, wood or iron. Miners, farmers and fishermen are all workers in the ...

, allocated to

wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...

s (

labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...

). It is related to the capital or profit share, the part of income going to

capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...

, which is also known as the K– Y ratio. The labor share is a key indicator for the

distribution of income In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes eco ...

. The wage share is

countercyclical Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with business cycle fluctuations in gross domestic product (GDP). The scope of the concept may differ between the context ...

; that is, it tends to fall when

output Output may refer to: * The information produced by a computer, see Input/output * An output state of a system, see state (computer science) * Output (economics), the amount of goods and services produced ** Gross output in economics, the value of ...

increases and rise when output decreases. Despite fluctuating over the

business cycle Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...

, the wage share was once thought to be stable, which

Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in m ...

described as "one of the most surprising, yet best-established facts in the whole range of economic statistics". However, the wage share has declined in most

developed countries A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...

since the 1980s.

Definition

The wage share can be defined in various ways, but

empirically In philosophy, empiricism is an epistemological theory that holds that knowledge or justification comes only or primarily from sensory experience. It is one of several views within epistemology, along with rationalism and skepticism. Empiri ...

it is usually defined as total labor compensation or labor costs over nominal

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is often ...

gross value added In economics, gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy. "Gross value added is the value of output minus the value of intermediate consumption; it is a measure of ...

. Often the capital share and labor share are assumed to sum to 100%, so that each can be deduced from the other. For example, the

Bureau of Labor Statistics The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of t ...

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''), ie. ''LS = C / CU''. The non-labor or capital share (''NLS'') is defined as 1 − ''LS''. In ''

Capital in the Twenty-First Century ''Capital in the Twenty-First Century'' (french: Le Capital au XXIe siècle) is a book written by French economist Thomas Piketty. It focuses on wealth and income inequality in Europe and the United States since the 18th century. It was initially ...

'', Piketty described the

accounting identity In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true. Where an accounting identity applies, any devia ...

''α'' = ''r'' × ''β'' as the 'first fundamental law of capitalism', where ''α'' represents the capital share, ''r'' is the rate of return on capital, and ''β'' is the capital to income ratio. Piketty defined the wage share as 1 − ''α''. Because the

self-employed Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return n ...

perform labor which is not rewarded with

s, 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. 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.

History

The importance of the distribution of income between the

factors of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...

–

land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...

and

– has long been recognized.

Ricardo Ricardo is the Spanish and Portuguese cognate of the name Richard. It derived from Proto-Germanic ''*rīks'' 'king, ruler' + ''*harduz'' 'hard, brave'. It may be a given name, or a surname. People Given name *Ricardo de Araújo Pereira, Portugu ...

(1817) said that to determine the laws which regulate this distribution is the "principal problem in

political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...

". Cobb and Douglas's '' Theory of Production'' (1928) introduced empirically-determined constants ''α'' and ''β'' which corresponded to the capital and labor share respectively. Cobb and Douglas found that the wage share was about 75%. For most of the 20th century, constant labor share was a

stylized fact In social sciences, especially economics, a stylized fact is a simplified presentation of an empirical finding. Stylized facts are broad tendencies that aim to summarize the data, offering essential truths while ignoring individual details. A prom ...

known as

Bowley's law Bowley's law, also known as the law of the constant wage share, is a stylized fact of economics which states that the wage share of a country, i.e., the share of a country's economic output that is given to employees as compensation for their work ...

. Historical measurements of the wage share can be charted using the

Federal Reserve Bank of St. Louis The Federal Reserve Bank of St. Louis is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the United States' central bank. Missouri is the only state to have two main Federal Reserve Banks (Ka ...

FRED Fred may refer to: People * Fred (name), including a list of people and characters with the name Mononym * Fred (cartoonist) (1931–2013), pen name of Fred Othon Aristidès, French * Fred (footballer, born 1949) (1949–2022), Frederico Ro ...

tool, which includes time series published by the

and

Bureau of Economic Analysis The Bureau of Economic Analysis (BEA) of the United States Department of Commerce is a U.S. government agency that provides official economy of the United States, macroeconomic and industry statistics, most notably reports about the gross domestic ...

Definition

History

See also

References

Further reading