Is Labor Compensation Still Falling in Advanced Economies?

In many advanced countries, the labor share has been declining since the 1980s

Labor compensation is still higher today than just before the Great Recession

But the labor share has declined further in the United States, Greece, and Spain

Changes in the labor share—the share of workers’ compensation in GDP—are a commonly used measure of inequality.

But the link between the labor share and inequality is not necessarily tight. While more income may be flowing to capital and less to labor, workers may own shares directly or via their pension funds. Thus, some of the income that goes to capital flows back to them, diminishing the impact of falling labor shares on inequality. Still, the labor share is a good indicator of trends in inequality.

Labor share fluctuations

The IMF study looks at the cyclical behavior of the labor share in advanced economies, especially during the Great Recession and the subsequent recovery. Labor share data point to countercyclical behavior—that is, rising labor shares during the Great Recession and falling shares during the recovery (see chart, top panel).

During the recession, profits were the component that contributed most often to the decline in income, which caused the labor share to increase. During the recovery, although all components of GDP increased, profits rebounded quite strongly in most economies, leading to a decline in the labor share.

Labor share behavior

In advanced Europe, the behavior of the labor share during the most recent recovery seems broadly similar to what took place during other recoveries between 1980...