science

Labor share

Labor share is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Labor share rather than just read about it. In short: In economics, the wage share or labor share is the part of national income, or the income of a particular economic sector, allocated to wages (labor). It is related to the capital or profit share, the part of income going to capital, which is also known as the K–Y ratio.

Key takeaways

Labor share belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Labor share to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Labor share from memory before moving on to harder problems.

Reference excerpt

In economics, the wage share or labor share is the part of national income, or the income of a particular economic sector, allocated to wages (labor). It is related to the capital or profit share, the part of income going to capital, which is also known as the K–Y ratio. The labor share is a key indicator for the distribution of income. The wage share is countercyclical; that is, it tends to fall when output increases and rise when output decreases. Despite fluctuating over the business cycle, the wage share was once thought to be stable, which Keynes described as "one of the most surprising, yet best-established facts in the whole range of economic statistics". The wage share has declined in most developed countries since the 1980s.

Definition

The wage share can be defined in various ways, but empirically it is usually defined as total labor compensation or labor costs over nominal GDP or gross value added. Often the capital share and labor share are assumed to sum to 100%, so that each can be deduced from the other. For example, the Bureau of Labor Statistics defines the labor share in a given sector (LS) as the ratio of labor compensation paid in that sector (C) to current dollar output (CU), i.e. LS = C / CU. The non-labor or capital share (NLS) is defined as 1 − LS. In Capital in the Twenty-First Century, Piketty described the accounting identity α = r × β as the 'first fundamental law of capitalism', where α represents the capital share, r is the rate of return on capital, and β is the capital to income ratio. Piketty defined the wage share as 1 − α. Because the self-employed perform labor which is not rewarded with wages, the labor share may be underestimated in sectors with a high rate of self-employment. One approach is to assume the labor share of proprietors' income to be fixed. The OECD and the Bureau of Labor Statistics adjust labor compensation by assuming that the self-employed have the same average wage as employees in the same sector.

History The importance of the distribution of income between the factors of production – capital, land and labor – has long been recognized. Ricardo (1817) said that to determine the laws which regulate this distribution is the "principal problem in political economy". Cobb and Douglas's Theory of Production (1928) introduced empirically determined constants α and β which corresponded to the capital and labor share respectively. Cobb and Douglas found that the wage share was about 75% in 1928. For most of the 20th century, constant labor share was a stylized fact known as Bowley's law. Historical measurements of the wage share can be charted using the Federal Reserve Bank of St. Louis's FRED tool, which includes time series published by the Bureau of Labor Statistics and Bureau of Economic Analysis.

See also Decoupling of wages from productivity Factors of production Factor shares Compensation of employees Measures of national income and output Value added Income distribution Labor economics Rate of exploitation

References

Further reading Labour Income Share Ratios for OECD countries, 1995–2010, at OECD.Stat Michael D. Giandrea and Shawn Sprague. Estimating the U.S. labor share. Monthly Labor Review, Feb 2017, https://doi.org/10.21916/mlr.2017.7

Illustrations

Worked examples

Example 1 — a first encounter with Labor share

Start with the simplest possible case. Write down what Labor share claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Labor share before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Labor share ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Labor share

In research: Labor share appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Labor share in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Labor share is common in secondary-school and first-year university syllabi. It links to neighbouring topics Labour economics indices, Macroeconomic indicators, National accounts, so understanding it makes those chapters shorter.
In everyday life: Look for Labor share outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Labor share in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Labor share means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Labor share out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Labor share in simple terms?

Why does Labor share matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Labor share?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Labor share.