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Musings Report #32 8-8-15 Why Has Labor's Share of GDP Declined for 40 Years?
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Why Has Labor's Share of GDP Declined for 40 Years?
One of the primary purposes of the Musings Reports is to share the process of "thinking through the problem/question" with you, the trusted Inner Circle.
I change my mind as new information becomes available or readers correct me, and then extend what is presented here into a blog post, essay or book.
So bear with me while I ponder a fascinating and profound question: Why Has Labor's Share of GDP Declined for 40 Years?
(chart courtesy of davefairtex)
Why is this fascinating? Generally, trends reflect macro conditions. For example: when oil shoots up in price, recessions follow. This is an obvious and well-supported correlation: when households have to spend more income on fuel, they have less to spend on other stuff, and that decline in spending pushes the economy into recession.
But labor's declining share of GDP hasn't changed as macro conditions change. Other than the brief 5-year dot-com boom of 1995-2000, labor's share of GDP has dropped for four decades, through recessions and booms alike.
Why is this profound? If wages and salaries--earned income--is a steadily decreasing share of the entire economy, this means household earned income is eroding even when the economy is expanding.
And this is precisely what we see now: household income actually declined 8.5% since 2000 when adjusted for inflation.
How can households pay rising taxes, borrow more money and spend more to support a consumer economy on an income that's shrinking even when the economy is expanding?
Answer: they can't. "Something's gotta give": they can't pay higher taxes, borrow more money (and incur more monthly payments) and spend more on goods and services when their incomes are stagnating. It simply isn't possible.
Interestingly, labor's share of GDP only rose when labor was in strong demand:
1. in the late 1960s "guns and butter" era of Vietnam era military spending and new social-welfare programs
2. in the dot-com era, when building out the Internet created tens of thousands of high-paying jobs
3. in the housing booms of the late 1970s, the late 1980s and the subprime bubble of 2006-2008
In each of these housing-booms, the spike up was muted and short-lived.
The decline in labor's share of GDP in the stagflationary 1970s makes sense--in a long recession-prone environment, businesses will hire fewer people and suppress wage increases.
But what about the booming 1980s, when financialization, housing and the first wave of personal computing all took off? Why would wages/salaries' share of a booming GDP drop so precipitously?
The early 1990s, a time of post-Cold War/post-USSR good feelings, was generally prosperous, as the spike in oil prices from the First Gulf War was short-lived.
That was followed by the once-in-a-century dot-com bubble, which seemed to break the down-trend in labor's share of GDP.
But the bust phase wiped out all the gains and then some. The subprime housing boom triggered a short-lived rally but that reversed as wages/salaries' share of GDP hit a new low in the 2009 recession.
So what factors have persisted through all these changing trends? Two possibilities occur to me:
1. technology that boosts productivity (and thus profits if wages are kept in line) has been steadily becoming cheaper and more powerful.
2. an enduring surplus of low-productivity, low-profitability labor
As every clock-cycle in CPUs (central processing units) and every byte of memory became cheaper, replacing human labor with automation became increasingly affordable.
As the working-age population expanded (for two reasons--the Baby Boom and women entering the workforce en masse), a surplus of low-productivity labor developed beneath the surface of apparently prosperous eras.
In recessionary eras, job cuts slashed labor's share of GDP but when the economy came back, many of the low-skill, low productivity jobs did not, because they had been automated to save money.
These trends kicked into high gear when globalization (i.e. offshore competition and global supply chains) gutted U.S. industries in the 1970s (competition from Japan and South Korea) and again in the 1990s-2000s as competition from China and other emerging economies pressured U.S. corporate costs and profits.
If these factors continue to play out--and I see no reason they won't--we can expect labor's share of GDP to continue its slide as human labor is automated in a highly globalized economy.
This erosion of earned income and household finances does not enable "growth" based on spending and more borrowing. If these are no longer possible, the status quo has no Plan B.
Summary of the Blog This Past Week
Here's the Next Crisis "Nobody Saw Coming"
Where Did the GDP "Growth" Go? Not into Wages
I Sure Am Glad There's No Inflation
Billary Clinton and the Perfection of Consumerist Narcissism
Rent Bubble = Housing Bubble = Rent Bubble
I'm always pleasantly surprised when something I wrote in a hurry gets 162,000+ reads on Zero Hedge (or elsewhere).
Best Thing That Happened To Me This Week
A fun day in and around Sebastopol (Sonoma County CA) with my Peak Prosperity compadres Adam Taggart and Davefairtex: picked Gravenstein apples for pies, tossed a few to the pigs (they were happy), nice brewpub meal and beer, tasted locally made sloe gin, and of course, shared lots of insightful financial/market analysis....less fun, the traffic jam going home...but that's N. Cali for ya....an 8 million-strong parking lot in rush hour...
Market Musings: Dow Jones 30 (DJIA)
I haven't looked at the Dow 30 (DJIA or INDU) is a while, and what really pops out is the rounded top that has formed in the past 10 months.
Unlike bottoms, which are often identified by panic-spikes down, tops are rarely clearly defined events--they are a process which is often characterized by a slow deterioration that traces out a rounded or dome top.
The 9-day MA has been trending down for months, reflecting a short-term trend that has yet to rebound.
MACD has been trending down for the entire 10-month period, and is about to drop below the neutral line--the region where bad things (like mini-crashes) tend to happen.
The stochastic indicator is very oversold, suggesting a bounce is imminent. But the bounce maybe short-lived, as the longer-term indicator (MACD) is still heading down to negative territory.
If we only had this one chart to consider, it strongly suggests further declines are increasingly likely after an oversold bounce plays out.
From Left Field
From a Million Miles Away, NASA Camera Shows Moon Crossing Face of Earth (via Ben G.) fantastic!
How Amsterdam became the bicycle capital of the world
In the 1960s, Dutch cities were increasingly in thrall to motorists, with the car seen as the transport of the future. It took the intolerable toll of child traffic deaths – and fierce activism – to turn Amsterdam into the cycling nirvana of today.
Inside the failure of Google+, a very expensive attempt to unseat Facebook ... never understood how to use Google+, too obscure to new users...
The Complete Breakdown Of Every Hillary And Bill Clinton Speech, And Fee, Since 2013 ... just regular working folk...
On the Passing of the Working Class ... nobody's working class any more--everyone's "middle class" (whatever that means...)
Robert Conquest, Historian Who Documented Soviet Horrors, Dies at 98 ... the best revenge is being right....
BBC series about Nietzsche, Heidegger, and Sartre -- three nutty heavyweights in Western philosophy....
The Real Problem with Capitalism (6:42) compartmentalized thinking....I am not sure this is limited to capitalism....
What is U.S. electricity generation by energy source?
Major energy sources and percent share of total U.S. electricity generation in 2014:
How a Chinese Billionaire Built Her Fortune (via Maoxian) ... no connections, hard work, lucky break from Motorola...
Dire economic outlooks typically lead to emotional reactions and social fragmentation -- few analysts discuss the psychological effects of financial stagnation...
Disappearing Lanai (photos) ...I lived on Lanai 1969-70--a wonderful, unforgettable experience--old-kine plantation days--worked in the pineapple fields in summer, the only haole on the local crews... still have many friends from that year.
Summer Solutions with Max Keiser and Stacy Herbert (25:45) ...oh, and me....
“Failure is simply the opportunity to begin again, this time more intelligently.” Henry Ford
Thanks for reading--
charles |
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