Why is the US Labor Share in Income Decline and Will It Stop?

This page is UNDER CONSTRUCTION. Your comments and answers to questions would be appreciated. The topic is by no means simple and easy to analyze!

Except for a peak in the year 2000 (graphic above), Labor's Share of national Income (Q/L) in the United States has been consistently declining. There are two outstanding questions: (1) Why and (2) When will it stop or possibly reverse. This post test seven State Space models of the US economy to decide which model best explains the decline and forecasts what might happen in the future under each of the different models. The "best" model explains the labor share time paths as a result of inputs from the World System in which the US Economy is embedded.

The competing explanations for the decline in Labor's share are:

• Technological Change
• Dynamics of the US Economy
• Globalization and the World System

In the graphic above, six of the models are compared against a Random Walk, that is, no explanation.

In Neoclassical Economic Theory

In Marxist Theory

ChatGPT summarizes it's findings as:

Here is a Causal Diagram of the ChatGPT explanation.

Notes

Questions

1. What policy measures (if any) would you recommend to address the decline in Labor's Share of National Income?

References

NY Times (Sep 7, 2026) Why is Labor's Share of National Income Declining Is Technology the most important factor?

BLS, Second Quarter 2026, Revised, Economic News Release Labor productivity by sector

IMF (2017) What Explains the Decline of the U.S. Labor Share of Income? An Analysis of State and Industry Level Data we find that in addition to changes in labor institutions, technological change and different forms of trade integration lowered the labor share. In particular, the fall was largest, on average, in industries that saw: a high initial intensity of “routinizable” occupations; steep declines in unionization; a high level of competition from imports; and a high intensity of foreign input usage.\

NBER (2018) Is Automation Labor-Displacing? Productivity Growth, Employment, and the Labor Share We find that automation displaces employment and reduces labor's share of value-added in the industries in which it originates (a direct effect).

BLS (2020) Assessing the Impact of New Technologies on the Labor Market: Key Constructs, Gaps, and Data Collection Strategies for the Bureau of Labor Statistics Private and public decisions related to labor markets and working conditions are increasingly being influenced by technological considerations. Spurred by a wave of technological developments related to digitization, artificial intelligence (AI), and automation, governments around the world have declared that the creation and deployment of these technologies present both important opportunities and challenges to their citizens.

AER (2022) The Decline of the Labor Share: New Empirical Evidence We use time series techniques to estimate the importance of four main explanations for the decline of the US labor income share: rising firm markups, falling bargaining power of workers, higher investment-specific technology growth, and more automated production processes ... Our results point to automation as the main driver of the labor share.

 

Wikipedia Links

• Solow-Swan  an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress. At its core, it is an aggregate production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics".
• Marxian Economics  a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy.
• Ricardo: Iron Law of Wages a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century. Karl Marx and Friedrich Engels attribute the doctrine to Lassalle (notably in Marx's 1875 Critique of the Gotha Program), the idea to Thomas Malthus's (1798) An Essay on the Principle of Population, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.
• Akaike Information Criterion (AIC) an estimator of prediction error and thereby relative quality of statistical models for a given set of data. Given a collection of models for the data, AIC estimates the quality of each model, relative to each of the other models. Thus, AIC provides a means for model selection.
• Labor's Share 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.

Solow-Swan

In the Solow-Swan Neoclassical economic model, wages (W) and profits (R) have fixed parameters in the model, w and r respectively.

Marx-Ricardo

In the Marx-Rocardo model, the Iron Law of Wages determines that, in the long run, the wage parameter, (w), is fixed at the level of subsistence as a result of market pressure and capitalist exploitation.

AIC Statistics

In terms of the AIC Statistics (smaller is better), the best model takes the World System (WL20 model) as input.

TECHE Forecast: Union Membership

Union Membership is forecast to be zero around 2060 as a result of Technical Efficiency Changes (TECHE). However,

There is not a lot of separation between the model AIC Statistics (above) and their confidence intervals.

TECHE Forecast: KOF Globalization

USL201 Forecast: W Index

 

USL20 Health Care Forecasts

Recently, the PBS News Hour interviewed a Primary Care Physician (here) to discuss problems in the US Healthcare System.

The summary of problems (from Google AI, above) suggests the following solutions  (also Google AI) to get control of the system:

To help understand the problems and difficulties, I ran four forecasts with the USL20HC Model (presented in the graph above). Both the Business-As-Usual (BAU) model and the USL203 Model as input** are unstable. Stabilizing (controlling) the BAUC model produces more moderate growth until after 2100.

Controlling specific parts of the system (Prices and Hospital Investment) without affecting Quality of Service will not be easy. Attempts to control Prices have failed (see Pasdirtz, 2007) largely for political reasons. ChatGPT notes:

A reduction in demand for Healthcare when the Baby Boomer Generation has aged out of the system might help. Until then, I do not see the political will necessary to change the system. However, Healthcare costs are directly related to the US Affordability Crisis (Google AI):

If dealing with the US Affordability Crisis becomes one of the outputs of the US Political System, then Healthcare expenditure has to be considered. If the US Healthcare System becomes more fully integrated with the US Political System, the relationships between HC1 = (Growth - Hospitals) might become more closely related to Austerity, Hardship and Debt management--and be affected by Growth or Collapse in the US Political System.

Right now, problems in the US Healthcare System are more a function of what the US Political System thinks it is supposed to be doing for the American people. In the Trump II Administration, it is not entire clear what the US Political System thinks it is supposed to be doing for the American people.

Notes

• Healthcare in the United States  largely provided by private sector healthcare facilities, and paid for by a combination of public programs, county indigent health care programs, private insurance, and out-of-pocket payments. The U.S. is the only developed country without a system of universal healthcare, with around 92% of the population covered under some kind of health insurance for some, or all of the year.
  
  
• The Affordable Care Act  formally the Patient Protection and Affordable Care Act (PPACA) and informally known as Obamacare, is a landmark U.S. federal statute enacted by the 111th United States Congress and signed into law by President Barack Obama on March 23, 2010. Together with amendments made to it by the Health Care and Education Reconciliation Act of 2010, it represents the U.S. healthcare system's most significant regulatory overhaul and expansion of coverage since the enactment of Medicare and Medicaid in 1965. Most of the act remains in effect.
  
  
• Medicare Sustainable Growth Rate a method used by the Centers for Medicare and Medicaid Services (CMS) in the United States to control spending by Medicare on physician services.

** The idea behind using the USL203 Model as input is to keep growth of the US Healthcare system in line with growth of the US Economy (see Pasdirtz, 2007). See also, US Healthcare, Austerity and Debt.

Pasdirtz (2007) Controlling the US Healthcare System with Policy Wedges Springer Health.

For more of my posts about the US Healthcare system, see Blog Roll: Healthcare. For more information about how the State Space models were constructed and the data sources, see the Boiler Plate. You can run the USL20HC Model model yourself using the R-code on my Google Site.

USL20HC Measurement Model

The indicators above implement the basic Kaya Identity: N -> L -> Q -> K -> GDP.

Expanding the Kaya Identity to fit the US Healthcare system, we get the Directed Graph above.

Three components in the USL20HC State Space (computed using Principal Components Analysis, PCA) explain 99.80% of the variation in the indicators. HC1 is the Hospital-Growth Controller. HC2 is Output Controller and HC3 is the investment controller.

Using the Expanded Kaya Identity (above) chatGPT suggests controlling the US Healthcare system by direct interventional in the following indicators: Capping Prices, Controlling Investment and limiting Hospital Consolidation. Healthcare labor and insured population would depend on the growth limits imposed. Direct intervention would allow direct control of growth rates.

USL20HC BAU Model System Matrix

The USL20HC Model has two unstable components, HC1= (Hospital-Growth Controller) and HC3 = (Investment Controller).

USL20HC BAUC Model System Matrix

Notice that stabilizing the USL20HC Model model turns the HC1 = (Hospital-Growth Controller) into a Random Walk while HC3 = (Investment Controller) requires a reduced growth rate.

 

Should Canada Join the EU?

 

INDIA: The New Axis of Evil and Hardship

 

In a prior posts (here and here), I looked at the Geopolitical Effects on Hardship as a result of India's "Cockroach" Protests and the possibility of a New Axis of Evil forming involving Russia, China and India. In this post, I'll explore the effects of potential alliances between China, Russia and India on Hardship in India.

Notes

• The Axis of Evil   The term "axis of evil" is a reference to the Axis powers of World War II (Nazi Germany, Fascist Italy, and the Empire of Japan). An updated grouping consisting of China, Russia, Iran and North Korea, also known as CRINK, has been referred to as the "new axis of evil" by U.S. politicians and commentators, sometimes includes India.
• The New axis of Evil: Russia, China and India? 
• INDIA: Hardship and Protest
• MSN Two Decades of Mass Protests in India
• MSN India's Cockroach Protests called off
• CNN Why Political Fury is Boiling Over on the Streets of India's Capital 
• Economy of India a developing mixed economy with a notable public sector in strategic sectors.
• History of India Anatomically modern humans are estimated to have first arrived on the Indian subcontinent between 73,000 and 55,000 years ago.
• Politics of India  India is a parliamentary secular democratic republic, described as a “sovereign, socialist, secular democratic republic” in its constitution.
• Geography of India  On the south, India projects into and is bounded by the Indian Ocean—in particular, by the Arabian Sea on the west, the Lakshadweep Sea to the southwest, the Bay of Bengal on the east, and the Indian Ocean proper to the south.
• 2026 Delhi Jantar Mantar protests also referred to as the Indian Gen Z protests and the Cockroach protests, were a series of demonstrations initiated on 6 June 2026 by the Cockroach Janta Party (CJP), an Indian youth-based satirical political movement, alongside student organizations including the All India Students Federation, All India Students Association, and Students Federation of India.
• AIC Statistics The Akaike information criterion (AIC) is an estimator of prediction error and thereby relative quality of statistical models for a given set of data.
• Shefner et. al.  (2015) Austerity and Anti-Systemic Protest: Bringing Hardships Back In JWSR
• Globalization in India The goods produced in India had long been exported to far off destinations across the world; the concept of globalization is hardly new to India.



INL20 Hardship Measurement Model










HARD1 =  (Growth - mortality and longterm unemployment ),  HARD2: Unemployment and poverty, HARD3 = Business cycle, Unemployment and reduction in CPI.  From the World Development Indicators.

HARD1 CN-RU-BAU-RW AIC STATISTICS

The best short-term model, using the AIC Statistics, is the Random Walk (RW). 

IN CN-INPUT HARD1 MODEL

Hardship and Protest in India

India has had two decades of mass protest culminating in the 2026 Delhi Jantar Mantar protests or "Cockroach Protests". My questions are  (1) how much of the protests are a result of material conditions (Hardship) and (2) What possible response might the government consider in the face of discontent?

My Hardship Index (HARD1) for India has been increasing since the 1960s (see the graphic above). The Business-as-Usual forecast (BAU) suggests that, even though the model is stable (see below), Hardship will increase linearly until well after 2100--not a desirable outcome.

Linking India Geopolitically with the United States would result in a Hardship peak around 2040 and decline after that. Future increases in Hardship before the decline might or might not be sustainable politically.

Linking India Geopolitically to the World System keeps Hardship steady until after 2040 when it starts decreasing. This would be the best outcome but the most difficult to achieve politically (I will explore the difficulty of linking to the World System more fully in future posts).

Of course, India can keep muddling through, randomly responding to Protests (a Random Walk, RW) and hope that  protesters will retreat from the streets, pushing problems off into the future at the current level of Hardship. 

For more of my posts on India see Blog Roll: India. The WL20 India Model in R-Code is available on my Google site. INL20 BAU is an example of a moving equilibrium model that can both easily be stabilized or destabilized. Also, see the About page and the Boiler Plate.

 Notes

• MSN Two Decades of Mass Protests in India
• MSN India's Cockroach Protests called off
• CNN Why Political Fury is Boiling Over on the Streets of India's Capital 
• Economy of India a developing mixed economy with a notable public sector in strategic sectors.
• History of India Anatomically modern humans are estimated to have first arrived on the Indian subcontinent between 73,000 and 55,000 years ago.
• Politics of India  India is a parliamentary secular democratic republic, described as a “sovereign, socialist, secular democratic republic” in its constitution.
• Geography of India  On the south, India projects into and is bounded by the Indian Ocean—in particular, by the Arabian Sea on the west, the Lakshadweep Sea to the southwest, the Bay of Bengal on the east, and the Indian Ocean proper to the south.
• 2026 Delhi Jantar Mantar protests also referred to as the Indian Gen Z protests and the Cockroach protests, were a series of demonstrations initiated on 6 June 2026 by the Cockroach Janta Party (CJP), an Indian youth-based satirical political movement, alongside student organizations including the All India Students Federation, All India Students Association, and Students Federation of India.
• AIC Statistics The Akaike information criterion (AIC) is an estimator of prediction error and thereby relative quality of statistical models for a given set of data.
• Shefner et. al.  (2015) Austerity and Anti-Systemic Protest: Bringing Hardships Back In JWSR
• Globalization in India The goods produced in India had long been exported to far off destinations across the world; the concept of globalization is hardly new to India.

INL20 Hardship Measurement Model

HARD1 =  (Growth - mortality and longterm unemployment ),  HARD2: Unemployment and poverty, HARD3 = Business cycle, Unemployment and reduction in CPI.  From the World Development Indicators.

INL20 HARD1 AIC STATISTICS

Best model is W-input.

INL20 HARD1 W-INPUT MODEL

The model is stable. Commodity Markets have the biggest negative impact on Hardship.

WL20 MEASUREMENT MODEL

W1 = (Growth-LP), W2 = (LP+P.Wheat-TEMP), W3 = (Commodity Markets).