Labour’s share of income: why are trends in the U.S. and Canada so different?

Stephen Gordon ponders the great, unsolved puzzle

by Stephen Gordon

The Federal Reserve Bank of Cleveland has a commentary discussing how the share of total U.S. income coming from wages (known as labour’s share, as opposed to other sources of income, like investment) has been shrinking over the past decades:

Labour’s share of income is generally counter-cyclical, rising in recessions. This is not because wages grow strongly during recessions: labour’s share increases because profits—which are much more volatile—fall. But the trend seen in the U.S. since the oil price shock of the 1970s is one in which labour’s share is drifting steadily downward. The share of GNP going to workers is almost 10 percentage points lower than what it was 40 years ago.

What about Canada?

As noted earlier, the spikes in the labour share are more a function of low profits than of high wages: the peaks you see in the chart above are associated with recessions. Still, there doesn’t seem to be the same sort of downward trend that you see in the U.S. data: the labour share is roughly where it was back in the 1960s.

This brings us to the question: why is there such a difference? It’s very likely that much of the loss in labour’s share of U.S. income can be attributed to phenomena such as increased competition from low-wage countries and offshoring, but why didn’t it have the same effect on Canada?

One conjecture might be the importance of natural resources in Canada: those jobs cannot be outsourced the way that manufacturing jobs can. But it’s only a conjecture; I don’t have a good answer.




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Labour’s share of income: why are trends in the U.S. and Canada so different?

  1. Prof Gordon North America is significantly richer than we were 40 or 50 yrs ago, isn’t it a good thing that labour share of income is falling? Less people dependent on working for $$$, they have more money from investments or inheritances or ……

    I also read before that some of these income studies on US don’t include private health care insurance that companies pay for their employees. Incomes are stagnant but health care policies improving considerably.

    And corp tax rates are different – lower corp taxes in Canada means higher salaries for employees.

    Globe/Mail ~ Abolish Corporate Tax:

    Corporate tax, he noted, is fundamentally regressive: It shifts wealth to the rich. And not just because General Electric avoids it and corner shops don’t. Since corporations do not physically exist, corporate tax is ultimately paid by individuals – and, as many studies have shown, those individuals tend to be the company’s workers more often than its shareholders or executives.

    • North America is significantly richer than we were 40 or 50 yrs ago, isn’t it a good thing that labour share of income is falling? Less people dependent on working for $$$, they have more money from investments or inheritances or …..

      I don’t think that’s what’s happening. It’s not that significantly more people are making money from investments and having to work less, it’s that the amount of money that the “investment class” makes is rising MUCH faster than the amount of money the “working class” makes.

      You make it sound as though a lot more factory workers are suddenly becoming CEOs. What I think is ACTUALLY happening is that the amount of money CEOs make is rising much faster than the amount of money factory workers make.

      • Odd though that it doesn’t seem to have happened here to the same extent. Or is that simply a function of a more highly [fairly?] regulated market?

        • That, and perhaps the higher percentage of major international corporations headquartered in the U.S.

      • America is easily the wealthiest country in world, and poor people around the world aspire to emigrate there. It is communist economics to focus on non existent wealth gaps when all Americans have a better standard of living than all Canadians. People getting wealthier is what we want, the more rich people there are means more jobs and money for hoi polloi.

        I just finished re-reading M Lewis The Big Short and he writes about strippers in vegas who had multiple mortgages/homes, itinerant fruit picker from mexico was given $700,000 mortgage in california. Bill Gates might have tens of billions $$$ in his bank account but that wealth creation contributes to America being able to give a vegas stripper mortgages on five homes. God bless america.

        ———

        The foundation of collectivism is simple: There should be no important economic differences among people. No one should be too rich. No one should be too poor. We should “close the wealth gap.”

        This is a very powerful idea. This is a very common idea. This is a very bad idea.

        “Gaps”–differences–are innate to mankind. Do we want to close the “beauty gap” and make every woman look like Margaret Thatcher? Do we want to close the “talent gap” and field a World Cup football team starring, for example, the people on this panel?

        In a world without gaps we’d all be the same.

        But proposing to close the “wealth gap” is worse than silly. It entails a lie. The notion of economic equality is based on an ancient and ugly falsehood central to bad economic thinking: There’s a fixed amount of wealth. Wealth is zero-sum. If I have too many cups of tea, you have to lick the tea pot. But wealth is based on productivity. Productivity is expandable.

        So, if wealth is not theft, if the thing that makes you rich doesn’t make me poor, why don’t collectivists concentrate on the question, “How do we make everyone wealthy?” Or better, “How have we been managing to do this so brilliantly since 1820?”

        http://www.cato.org/publications/speeches/closing-wealth-gap

        • all Americans have a better standard of living than all Canadians

          Ummmm. WHAT?!?!?

        • Tony, you are missing an essential stop gap to your fable of marginal productivity: the difference principle.

          A new method of production and distribution that increases inequality IS ONLY justifiable if it benefits the worst-off members of society. This is a moral constraint on a different kind of collectivism — the collective of “the economy.” For example, it might be shown that ending certain regulations increases productivity. But if the effect is greater overall productivity at the expense of more pain for a certain group, than the collective benefit is immoral re: the difference principle.

          There is nothing “innate” about our monetary-financial regime.

        • Riiiight…of course you didn’t mention that these strippers and these indigent workers didn’t actually have the money to afford these houses…and the whole house of cards collapsed from sheer weight of this vast shell game.

          God bless america…where you can be proud to screw everyone with any ponzi scheme you can think of.

        • If wealth is not a fixed amount, if it is basically infinitely expandable, why is it that those with the most wealth (the “factory owners”), fight so so hard to minimize the incomes/benefits of the “factory workers”?
          And the point of the stripper/itinerant worker andecdotes was what, exactly?

    • “…and, as many studies have shown, those individuals tend to be the
      company’s workers more often than its shareholders or executives.”

      Doesn’t seem to be working right now, on the investment side or wage side. Could it be those benefits are only passed along during boom times or labour shortages?
      Seems to this layman to be a pretty good argument for not lowering CITs during tough times. Perhaps lowering other taxes such a pay roll taxes would be more prudent? We could sure do with those CIT $ right now to invest in infrastructure and in Aboriginal communities.

    • The middle class is getting badly squeezed, there’s no question about it. It’s hardly a good sign that labour accounts for less of the GDP than it used to. Much of that GDP is now just paper-chasing activities in the financial sector. Print more money, GDP magically rises. Create inflation indices that don’t truly account for inflation, and your nominal GDP minus the inflation rate still gives you a positive real GDP. At least in the official statistics. Meanwhile, in the real world, the middle class continues to get squeezed by declining incomes and inflation. (Believe it or not, housing prices aren’t included in the inflation index. The biggest purchase you’ll ever make, and it’s nowhere to be found in the US or Canadian CPIs.)

  2. How about the generally higher minimum wage in Canadian jurisdictions — and the absence of right to work legislation (i.e. anti-union legislation).

  3. So, the middle class isn’t evaporating before our eyes, as we’re so often led to believe?

  4. Productivity.

  5. HIgher percentage of Unionized workers + minimum wage laws?

    • Their labour attenuator goes up to 11.

  6. From reading the US article, it seems that the decline in the USA stems from a noteable increase in revenues coming from financial activity: in the US it looks like you can make more money by investing it rather than conventional spending. This is most likely linked to the various deregulations the US went through and how big business and big banks have, to an extent, found common ground by making money off of more money rather than by producing.
    I have very little knowledge in the financial domain, but we keep hearing how the Liberals banking regulations installed in the 90′s saved the day for Canada, maybe they also helped keep labour income more in line with “capital” income (if that is the appropriate term). Businesses want to make money, and it can be expected that those businesses will take the path of least resistance: it sounds like it was far easier to make boatloads off of investing than anything else.

  7. Unions.

    And factory workers are working class, not middle class.

    • If they’re making middle class wages, they’re middle class. I know it drives you nuts to see anyone making a good living with their hands, but some people still do that. We can’t all be sociologists.

      • No, class is not determined by wages.

        Perhaps if you read something about it……

        Oh wait, that would violate your values….

  8. Maybe Canada is not so much different as slower.
    Patience, Butterfly. It’s coming.

  9. “One conjecture might be the importance of natural resources in Canada:
    those jobs cannot be outsourced the way that manufacturing jobs can. But
    it’s only a conjecture; I don’t have a good answer.”

    Oh i’m sure the corps would love to dig up all of nothern AB and fly it to China if they could, since they can’t just magic cheaper labour costs here. Maybe bringing in cheaper foreign workers might help fix that higher labour rate?

  10. Gordon, perhaps there is a relation to the lower labour productivity (in terms of GDP per work hours) in Canada? Perhaps it is because less labour is required in the USA to produce the same level of output? Seems to me like the two things are two sides of the same coin.

  11. Auto Pact could have played a role. Maturing of Canadian manufacturing industries during that period until FTA and NAFTA, which obliterated any reason for manufacturing to stay in Canada (why stay in Canada and far away from your market). capped off with the rise of China.

    Note: Autopact was 1965, FTA was 1988, and NAFTA was 1996.

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