September 18, 2018

There is NO such thing as a “labor share of income”

Comment on Stephen Gordon on ‘Why do we care about the labour share of income?’


Stephen Gordon summarizes: “A lot has been said and written about the decline in the labour share of income, usually calculated as total employee compensation divided by nominal GDP. This decline is generally regarded as a negative development: the reduction in the share of income going to workers is interpreted as a symptom of suppressed wage growth and of increased income inequality.”

Indeed, a lot has been said and written about income, wages, profits and all is false because economists failed for 200+ years to get the concept of profit straight. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1 In other words, economists have NO idea what the pivot of their subject matter is.

Because profit is ill-defined, income is ill-defined, and by consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income but the difference of flows. Distributed profit is income but profit is NOT income. Distributed profit and profit are NOT the same things.

By consequence, total income is NOT the sum of wages and profits,#2 which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”. This means that the content of this thread, comments included, is vacuous blather because all are based on false premises. #3, #4, #5, #6

Without true profit theory, there is no true distribution theory. The axiomatically correct Profit Law is given as Qm≡Yd+(I−Sm)+(G−T)+(X−M) (i) and this reduces to Qm≡(I−Sm)+(G−T) (ii) for Yd, X, M=0; Legend: Qm monetary profit/loss, Yd distributed profit, I investment expenditure, Sm monetary saving/dissaving, G government expenditures, T taxes, X exports, M imports. Total profit Q is the sum of monetary and nonmonetary profit, i.e. Q≡Qm+Qn (iii).

Accordingly, the so-called “labor share” λ ― which is NOT a “share” but a quotient ― is defined as the relation of wage income Yw to the sum of wage income and total profit Q, that is, λ≡Yw/(Yw+Q) with Q given by (iii) above.

The fact is that neither market power nor declining unionization nor automation can account for a falling “labor share” λ. The main drivers of increasing overall profit have been in the past decades the increased deficit spending of the household sector and the government sector which translates into an ever-growing private/public debt.

Traditional distribution theory and the concept of a wage/profit “share” is abysmal proto-scientific garbage since the founding fathers.#7, #8

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#3 Profit and distribution: a primer
#4 Profit and the decline of labor’s nominal share (I)
#5 Profit, income, and the Humpty Dumpty Fallacy
#6 For details of the big picture see cross-references Profit
#7 Ricardo, too, got profit theory wrong
#8 Economists simply don’t get it

Related 'Truth by definition? The Profit Theory is axiomatically false for 200+ years' and Links on McKinsey’s ‘A new look at the declining labor share of income in the United States’ and 'There is NO such thing as a “labor share of income”’ and 'Profit and the decline of workers’ nominal share (II)’ and 'Profit and the decline of labor’s nominal share (I)’ and 'Income Distribution, Profit, and Real Shares


Source FRED taken from WTF Happened In 1971?