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Economic sectors 06 Sep 2018

The labour share in a service economy

Labour’s share of national income has dropped in most of the developed countries and emerging economies in the past few decades. This trend is not common across industries: the share of income accounted for by wages has seen an increase in the service industry, while it has recorded a fall in the other industries.

Up until some years ago, labour’s share of total national income had been a virtual constant, but several recent academic studies indicate that income attributable to labour has dropped in most developed and emerging nations over the past few years.

For example, in the decades leading up to 1980 in the U.S., the labour share represented about 66 percent of national income. Beginning in the early 80s, however, this figure gradually come down and today accounts for less than 60 percent of national income. This difference implies a shift of several billion dollars out of labour income and into capital income, which could be a cause of concern. The less wealth there is in the hands of workers, the greater is the risk of economic inequality and social unrest increasing.

It is worth noting that the drop in labour’s share of income is not pervasive across industries. In fact, there has been a general divergence between services and the rest of the economy over the last three decades. Moreover, this pattern is not exclusive to the United States, but it is also present in Spain and several European countries.

What is driving this diverging pattern? To a large extent these trends are explained by divergences within sectors in terms of the evolution of the share accounted for by wages rather than to any changes in the economy’s industry composition.

The main reason underlying these trends appears to be the sharp fall in the relative price of investment goods and capital with respect to labour. The relative cheapening of machinery and capital goods has prompted companies (particularly in the manufacturing industry, which is more intensive in routine tasks) to buy machinery instead of taking on workers.

In Spain, despite the fact that the share of wages in aggregate income has held relatively steady over recent decades, we can also see a divergence between services and the rest of the economy.


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