Mystery (Sort of) Solved: Why are Wages so Low?

Two big trends have hit the economy over the last four decades.

One, worker wages as a percentage of GDP have plunged. It looks like this:

Two, corporate profits as a percentage of GDP have surged. Here's that:

What's going on here?

For years the explanation was that corporate owners were collecting more of the economic pie for themselves at the expense of workers. Unions declined, shareholders benefited, and so on. And that's almost certainly the case.

But a new paper published by the Brookings Institute shows that explanation might be overstated. The paper covers a lot of ground in the wages vs. profits debate, but this part stuck out:

[Around] one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure.

In other words, part of what we may have been counting as profits are what most people would call wages. Millions of workers are employed on a contract basis, often working full time for an employer but invoicing for their work, rather than receiving a salary. Most of these workers would consider themselves employees. But if their income is counted as a business profit, measurements become skewed.

What explains the other two-thirds of labor's decline? A lot of it is the decline of labor-heavy industries like manufacturing. Here's economist Justin Wolfers on the report:

My favorite example of former high-labor industries pushing out labor's share of the economy is the steel market. In 1950, a U.S. Steel plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers, according toThe New York Times. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.

Anyway, this is another example of how we need to be careful drawing strict conclusions from data.

The article Mystery (Sort of) Solved: Why are Wages so Low? originally appeared on

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