Growth at an Educational Price

Why is labor’s share of income going down?

Source: Bureau of Labor Statistics

For the past 50 years, labor’s share of our national income has been declining. This has had profound effects on inequality, taxes, and the structure of our economy. Labor’s share is the percentage of national income that goes to workers as compensation. It’s a pretty simple calculation: employee compensation (wages and benefits) divided by economic output. It’s been falling since the ‘50s, and quite steeply for the last 15 years.

It’s sort-of the inverse of profits. As corporate profits rise, worker compensation falls. Only, corporate profits as a share of the economy fell from 1960 to 1985, until rising dramatically after 2000. So while rising profits may put some downward pressure on the share that wages have of our economy, they can’t explain everything. So why are workers getting less of the pie?

Source: St. Louis Fed

Could it be a lack education? Our economy has become more and more knowledge-based. Moore’s law and the proliferation of software into every aspect of our lives make technical skills more and more important. It used to be that an expert tool-and-die maker needed fine motor skills and an eye for minute imperfections. Now they need to know how to program the auto-lathe along seven axes to compensate for variations in alloy strength in their source of cutting stock.

Cars used to be purely mechanical. Now new models typically come with over 100 million lines of code – and they’re still woefully outmoded, compared with smartphones and other consumer electronics.

The decline in labor’s share in the economy isn’t just a US phenomenon, it’s happening around the world. This is part of the reason why workers feel left behind, and extreme political movements are gaining traction, from Islamists to nationalists to regional separatists. People are looking for answers.

Source: Penn World Tables 9.0, NBER

One way to look at education is as a way to build human capital. In order to access the massive productivity enhancements available today, you need the skills and knowledge to use them. A modern laser-cutter won’t do you any good if you can’t program it.

Since 1980, the growth in years of education in the workforce has slowed, for many reasons. A slower rate of educational attainment has translated into a slower rate of productivity growth. While it’s possible – even likely – that years of education is an imperfect indicator of human capital, it’s still the most likely aggregate measure

Education is expensive, in both time and money. But the alternative is worse. 2500 years ago Plato envisioned a society where leaders would spend over half their lives in formal schooling. For centuries, people thought that this was idealistic and excessive. But our modern economy may come to require just that.

Douglas R. Tengdin, CFA

By | 2017-10-02T08:33:38+00:00 October 2nd, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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