As labor's share of U.S. income falls, workers feel a pinch

Bob Alberti
Bob Alberti, who works in information security, photographed Thursday, July 8, 2015 in Minneapolis.
Jennifer Simonson | MPR News

Long before most people had heard of personal computers, Bob Alberti was already online in the late 1970s.

As a teenager in then-rural Bethel, Minn., he hooked his family's party-line telephone to a modem and hoped the neighbors on the other side of the lake didn't need to make a late-night call. That gave him access to chat, email and interactive online games.

Like many early computer buffs, Alberti parlayed his skills into a successful career as a technology expert. But far from rolling in wealth, in real terms he earns less than he did a decade and a half ago, an indication that workers are not benefiting much from the nation's slow economic recovery.

Indeed, labor's share of total income has fallen dramatically while investment income flowing to the very wealthy continues to rise.

Today at 52, Alberti is an information security architect who aims to prevent the next big data breach. Given recent news about high-profile hacks of large companies, one might think Alberti could write his own ticket. But he said that has never been the case.

"My salary in the year 2000 was about $100,000," he said. "And my salary today is about $115,000."

In today's dollars, Alberti earns $22,000 less than he did 15 years ago, which he acknowledges is far more than what most Minnesotans earn. The median household income in Minnesota is about $60,000, according to U.S. Census data.

Still Alberti blames outsourcing and competition from foreign tech workers for the effective pay cut.

He is far from the only one to feel it. For most of the 20th century, U.S. workers received 64 percent of all the income the nation's economy generated as pay for their labor. The remaining third was income generated by those who put their wealth to work and invested capital that generated income from dividends or capital gains.

Since then, the slice of total income coming from wages or the "labor share" as economists call it, has shrunk, said Filippo Occhino, an economist at the Federal Reserve Bank of Cleveland.

"Now, 58 percent of total income is in the form of labor income and the rest is in the form of capital income," he said.

Wages' share of total income began slipping around 1980, a fall that accelerated at the turn of the century, Occhino said.

People in all sorts of occupations are feeling a pinch.

They include Laura Reynolds, who earns a solidly middle-class salary doing marketing work for law firms. At age 45, she has been in the same job for 10 years. But although she likes the work, Reynolds said she only earns about $12,000 more than when she started and barely keeps pace with inflation.

"What I don't have is the kind of income growth that I got the impression that I was to expect when I was in college," said Reynolds, of Minneapolis. "I have supposedly a white-collar job in a growing industry, so why is it that I'm not getting paid more?"

Economists say a variety of factors explain the decline in the labor share of income.

Occhino said one of the main reasons is workers' declining bargaining power, due in part to the long decline in union membership.

But although the rate of unionization started falling in the mid-1950s, wages still held steady as a portion of total income for decades. So the decline in organized labor is only part of the picture.

Occhino said another factor is globalization and the shifting of manufacturing, call centers and other operations from the United States to lower-wage regions abroad.

University of Chicago economist Brent Neiman pins much of the labor share's decline on cheaper and better technology — the sort that led to more robots in the warehouse and to online banking.

Increasingly, he said, companies are spending more on machines and tools at the expense of workers.

"To the extent that computers and other [capital] goods ... get a lot cheaper then, you might expect those firms to substitute more toward the use of capital in production," Neiman said.

Neiman notes that the declining share of labor income is global; it's happening in most of the world's countries including China.

But Occhino, of the Cleveland Fed, said it is important to watch wages' share of total income. With the vast majority of American households largely dependent on income from labor, he said the drop in the share going to workers means they won't spend as much.

That may be one reason behind the extremely slow pace of the current economic recovery, he said.

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