The Labor Share Fell. So What?

By Alex Tabarrok . 

"The share of Gross Domestic Income accruing to labor has been declining in recent decades while the share accruing to capital has been rising. In the graph below, I show labor compensation as a share of GDI (left axis). Labor share has indeed been trending down–some of this could be an artifact of the data, e.g. an increase in proprietor’s income (labor) mislabeled as capital income, more pass throughs and so forth—but for the purposes of this post I will accept that the labor share has declined. What does this mean?

 

The natural response is to think that because the share going to labor has fallen and the share going to capital has risen that there has been a transfer of income from labor to capital. That is possible but it is not the only interpretation and it does not follow mechanically from the share data.

I have also plotted total compensation to labor (in real terms) in the graph above and far from shrinking it is higher than ever and growing. Moreover the right axis is logged so you can also see that outside of recessions the growth rate of labor compensation looks quite steady (similar slope over time). (Labor compensation per member of the labor force is noisier but looks similar).

The recessions in 2008 and 2020 are worth noting because these are periods when the labor share was high and locally at a maximum! The reason, of course, is that GDI was shrinking in these periods more than labor compensation. In other words, capital takes a bigger hit than labor in a recession. This is a good reminder that a high share of GDI is not what workers most care about–a high absolute level of GDI is more important for the bottom line.

In short, the data are consistent—not proof of, but consistent with—a story in which capital has become more productive, raising output. More productive capital also raises the demand for labor, so while more of the new output goes to capital in the first instance, the pie is growing and labor’s absolute compensation has grown with it. Yes, if the shares had stayed constant and output had grown just as much, labor compensation would have been higher still. And if my grandmother had wheels, she would have been a bicycle."

Comment from Scott Sumner

"People often assume that if labor's share is falling then capital's share is rising. That is not always true, as GDI also includes depreciation and indirect business taxes, both of which have been rising as a share of GDI. So capital's share has risen by considerably less than labor's share has fallen.

Matt Rognlie showed that much of the rise in capital income has been the implicit rent on owner-occupied housing, which is not what most people think of when they hear "capital income". Another part of the rise is labor income being reclassified as capital income for tax purposes.

To the extent that inequality has increased, I suspect it's due more to a growing share of labor income going to the top 1% of earners."

The Impacts of Parole Supervision

From Jeffrey Miron.

"California, New York, and other states have lessened parole for exiting prisoners, hoping it will improve their reentry outcomes. One study of Illinois’ efforts

reveal[s] that the reform reduced the share of these prisoners who returned to prison within one year by 9–10 percentage points … This reduction was almost entirely due to a lower rate of technical revocations of supervision.

Further, there was

no evidence that the reform affected crime rates among released prisoners … [as] the absence of supervision reduced the likelihood of parolees committing crimes, offsetting any increases in crime associated with fewer technical revocations. … [Also,] longer terms of parole supervision diminish the benefits of lawful behavior because parolees face the ongoing threat of technical revocation.

The researchers also

conducted policy simulations to estimate the impact of reducing existing … [parole for low-to-medium offenders] by half. … [The] findings indicate that such a reform would reduce the average prison population by roughly 3 percent and likely cause no harm to public safety.

Altogether, the study

demonstrate[s] that existing parole systems increase reincarceration rates through technical violations of supervision conditions without bolstering public safety."

A cut in the corporate income tax rate leads to a larger expansion of clean firms

See The Environmental Bias of Corporate Income Taxation by Luigi Iovino, Thorsten Martin and Julien Sauvagnat.

"Abstract

We study the relationship between corporate income taxation and carbon dioxide (CO2) emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower income taxes on their capital income. Building on these new facts, we provide evidence that a cut in the corporate income tax rate leads to a larger expansion of clean firms. We develop a multi-sector general equilibrium model that accounts for our evidence and quantify the impact of corporate tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could reduce aggregate emissions without affecting GDP."

After 40 Years, No One Has Produced a Workable Single-Payer Health Care Plan

Vermont passed single-payer legislation in 2011 and abandoned the plan after three years of failure. Why?

By Veronique de Rugy. Excerpts:

"Brookings Institution economist Jessica Riedl has spent years waiting for one [a workable legislative proposal for single payer]. Her challenge is simple: Show us a progressive bill that specifies (a) a provider payment system that actually saves money under America's existing, already expensive health infrastructure, and (b) a financing mechanism to replace the roughly $32 trillion in private premiums and out-of-pocket costs that would need to be covered by federal taxes over the next decade."

"Despite hundreds of legislative proposals and multiple presidential campaigns built around the issue, no one has met the challenge."

"the proposals are only aspirational. They enumerate generous new benefits with great enthusiasm and then instruct the secretary of Health and Human Services to figure out the rest. The phrase "The Secretary shall" appears 62 times in the Sanders bill alone."

"European countries built modest, government-controlled health infrastructures from the ground up over several decades. They contained costs—meaning, among other things, they rationed care—as they expanded access. America did the opposite.

We built the most expensive, technologically advanced, sprawling health system in human history, which consumes nearly 20 percent of gross domestic product (GDP), under mostly private incentives and market pricing. As Riedl puts it, "We cannot simply pay European prices for the more vast American health infrastructure that exists."

The central theory of single-payer savings has always been this: Slash payments to providers to offset the surge in the use of universal, no-cost-at-point-of-service coverage. The Congressional Budget Office (CBO) took a serious look at this fantasy. Its conclusion was that national health expenditures might actually rise, and demand for care would outrun supply. The final result would be European-style rationing, delays, and forgone services, all leading to worsening health care.

Then there's the inconvenient question of how to get the tax revenue needed for a single-payer system to replace private health care premiums, out-of-pocket expenses, and state health programs. Although neither Sanders nor Jayapal has an answer, the Committee for a Responsible Federal Budget does. Financing a Sanders-style system would require a new 32 percent payroll tax, a 25 percent income surtax, or a 42 percent value-added tax, more than doubling every individual and corporate income-tax rate.

The CBO found that such a system would reduce GDP by 6 percent to 10 percent by 2030. From a movement that claims to care about working Americans, that number deserves more than silence.

The state-level record confirms what the nasty arithmetic and voters' disgust tell us. Vermont passed single-payer legislation in 2011 and assigned an expert commission to make the numbers work. After three years of failure, Gov. Peter Shumlin abandoned the plan, admitting that the required 11.5 percent payroll tax per company plus the 9.5 percent income tax per Vermonter (with small businesses paying both) would be politically unsurvivable even in Sanders' home state. Colorado voters rejected their single-payer initiative in 2016 after analysis showed that even tripling taxes wouldn't cover the costs.

Back in California in 2022, the state's nonpartisan legislative analyst estimated that the proposed single-payer system created by the California Guaranteed Health Care for All Act would cost between $494 billion and $552 billion annually. Imagine the taxes needed to more than double that state's spending overnight.

After the bill died without a vote, Assemblymember Ash Kalra (D–San Jose) reintroduced it in February 2026, and it failed to advance again a few months later. California has now killed single-payer twice in four years."

American Idle: The Work Ethic Goes Out of Style

One in 3 working-age American men aren’t so much as looking for a job

By Jason Riley. Excerpts:

"1 in 3 men were neither working nor looking for a job in April. Among males 20 and older, the 66% labor-force participation rate is down from 73% in 2006"

"the work rate for men 20 and older fell by more than 13 percentage points between 1965 and 2015."

"the fraction of men without jobs of any sort in the broad twenty-to-sixty-four group went from 10 percent of the total to almost 22 percent"

"the percentage of wholly jobless prime-age men shot from 6 percent to nearly 16 percent"

"It results . . . from an unwillingness to search for work" 

"work rates and LFPRs for white men today are decidedly lower than they were for black men in 1965"

"labor participation rates of married black men twenty-five-to-fifty-four are higher than for never-married white men in the same age group"

"foreign-born males who come to the U.S. in search of work also tend to have higher work rates"

"Neither married men nor immigrants are stealing these jobs"

"The more likely culprit is a social safety net full of generous government benefits that allow men who won’t work to subsist"

"Welfare and disability programs . . . are easily gamed by design" 

"Good" union contracts lead to job losses

See JD Vance Courts Sean O’Brien and the Teamsters by Allysia Finley. Excerpts:

"In the 2023-24 election cycle, 92% of Teamsters PAC donations to federal candidates went to Democrats, as did 91% of the union’s contributions to party committees."

[there was] "a report in February accusing two former Teamster officials of treating the union credit card “as a blank check to permit them luxury living without limit,” including restaurant tabs for meals with friends topping $3,000."

"In 2023, Yellow Corp., one of the country’s largest trucking companies, sought financial concessions from the Teamsters to stay in business. Mr. O’Brien refused and tweeted an image of a gravestone reading “Yellow 1924-2023.” The company filed for bankruptcy, and 22,000 Teamsters lost their jobs.

After threatening UPS with a strike that summer, Mr. O’Brien won a deal that increased average compensation for full-time drivers over five years to $170,000 from $145,000, including zero healthcare premiums and as much as seven weeks of vacation. Rising labor costs prompted UPS to cut 34,000 nonmanagement jobs last year, with another 30,000 planned for this year."

 

Free market policies lowered poverty in Peru

See The Left Aims for an Andean Comeback by Mary Anastasia O’Grady. Excerpt:

"Peru’s shift over the past 20 years toward policies that support open markets, private initiative and macroeconomic stability has dramatically improved living standards. The share of Peruvians living below the poverty line fell to 25.7% in 2025 from 58.7% in 2004."