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As Kaldor’s Facts Fall, Occupy Wall Street Rises

Author: Peter R. Orszag, Adjunct Senior Fellow
October 18, 2011
Bloomberg.com

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In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of “Kaldor's stylized facts,” articulated half a century ago by the Cambridge economist Nicholas Kaldor.

Recent experience betrays this lesson. Over the past two decades -- and especially since about 2000 -- the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries.

Labor share normally bounces around over the business cycle, but given how long the decline has lasted, it can't be dismissed as cyclical. And this partly explains the kind of anger and frustration that is fueling the Occupy Wall Street movement worldwide.

The numbers involved are substantial: In 1990, about 63 percent of business income in the U.S. took the form of wages and other types of labor compensation, according to data compiled by the Bureau of Labor Statistics. By 2005, that figure had dropped to 61 percent. And by the middle of this year, it had fallen to 58 percent. (Similar declines have occurred in other data sets, but are milder when the analysis includes the government, rather than only the private sector.)

The difference from 1990 to today -- about 5 percentage points or so of private-sector income -- amounts to more than $500 billion a year. In other words, if labor's share hadn't fallen, labor income would be $500 billion higher this year.

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