Capital Works Harder

Declining labour share of income is no sign of foul play.

"Productivity and profits are up, but real wages are down." is an increasingly common refrain, implying that business and government collude to deprive workers of their fair share.

Just take this article, "The economy is growing but workers are not getting the benefits", from the ABC. It invites the reader to ponder why Australian real wages have not risen with productivity growth, (begging the question as to why it should.)

Workers are, no doubt, bringing 110% of their A-game to the table.

But a business isn't just workers. There are also the materials that workers work with.

Karl Marx distinguished between land, labour, and capital. The ingredients of enterprise have only gotten more varied since. While a Victorian-era factory may only have required machines and children with nimble fingers, a 21st century concern may requires cars, laptops, ergonomic furniture, (salad bars, foos-ball tables, ...)

The declining labour share of income is a global phenomenon. Consider the U.S.:

What's interesting is that the U.S. Bureau of Labor Statistics records a commensurate rise in the proportion that capital plays in output.

Between 1987 and 2018 Labour contributions to U.S. output grew at 0.8% p.a. while the contribution of Capital grew at 1.2% p.a. (Multifactor productivity grew at 0.9% p.a. resulting in overall output growth of 2.9% p.a.) This growing investment in capital over labour is known as 'Capital Deepening'.) 

So labour's declining share of income can be partly explained by labour's declining share of input. Capital - plant, equipment, IT, office furniture - brings 150% to the game. That puts a twist in the discussion of fair distribution, doesn't it?

That profits are not paid to workers does not mean that they are hoarded. Rather than filling Scrooge McDuck style swimming vaults, they would be used to defend against downturns, satiate shareholders, or pay for more productivity-enhancing capital.

The OECD concludes that change in capital composition play a large part in capital's corresponding increasing share of income, while at the same time noting its potential effects on social cohesion.

McKinsey also finds capital deepening behind labour's falling share, but assigns the largest role to commodity super-cycles. The usual suspects of globalisation and liberalisation quite low on its causative list. Similarly, the ABC writes that a local commodities boom is behind most of the shift in Australia. 

Leaving aside why it seems enterprise prefers investing in capital to labour, outrage at the narrative of unappreciated workers could be paused to ponder if they should receive a greater share of the output considering their declining share of input. 

A larger question is whether developed nation governments should maintain their reliance on taxing labour income, particularly as their tax bases shrink from the double whammy of aging populations as well as declining labour income shares.