A new statistic has emerged in the debate about income inequality: labor’s share of America’s total economic output. Having averaged roughly two-thirds of GDP for over 30 years, it began to decline in the early 1980s and is now close to 50 percent. We need to get that back up, the argument goes, if America is to do well in the future.
Not necessarily. Before the Industrial Revolution, labor’s share of GDP would have been close to 90 percent. That’s how many Americans worked the land in order to feed 100 million people when farming was done with “40 acres and a mule.” Today, with modern equipment instead of mules, it takes only 3 percent of the population to feed more than 300 million people.
Some who bemoan the decline in labor’s portion of GDP blame it on the downward trend of union membership. They say that began when Ronald Reagan “broke” the air traffic controllers’ union by firing them.
Hardly. Air traffic controllers are public employees and public employee unions have grown rapidly enough since then to become the largest sector in the labor movement. The decline in union membership comes from the industrial unions, who are shrinking because industrial workers are increasingly unwilling to join them. The trend is so strong that union leaders have tried to eliminate the use of secret ballots in union elections.
Another charge is that Republicans have used the tax code to subsidize capital at the expense of labor. Here’s the record: Under Reagan, individual rates went down and capital gains rates went up. Under Clinton, the reverse: individual rates went up and capital gains rates went down — under Bush, both went down and under Obama, both went up. There has been no discernible tie between any of these actions and labor’s share of GDP. The real reason it has shrunk lies elsewhere.
We are in the midst of a revolution — the Information Revolution. Just as the Industrial Revolution eliminated backbreaking work on farms, the Information Revolution has eliminated repetitive work in factories. As an example, take the auto industry.
Before computers, America’s best-selling car, the Chevy, was built in a legacy factory in Detroit. It employed a lot of workers — all of them unionized — who spent most of their time performing a series of semi-skilled, repetitive tasks. The cost of labor was a significant portion of the cost of the final product.
Today, the best-selling car in America, the Honda Accord, is built in a modern plant in Ohio. I’ve been there. It employs far fewer workers — none of them unionized — who spend most of their time tending to the computers that control the robots that perform all of the repetitive tasks. The cost of labor is now a small portion of the final product, a better car than the old Chevy. Capital spent for technology pays off in terms of lower costs and increased productivity.
That’s why capital is increasing as a percentage of GDP. Honda didn’t go to Ohio looking for cheap labor to exploit. Like Nissan in Tennessee, Toyota in California and Mercedes-Benz in Alabama, it wanted to save shipping costs from Japan and make its cars more readily available to the market. Ford, GM, Chrysler and every other business surviving in the information age have made similar investment decisions.
We are no more going back to assembly lines that required thousands of workers to run them than we are to farms that required 90 percent of our population to tend them. Computers, robots and lasers are here to stay. No amount of political rhetoric can reverse that fact.
Robert Bennett, former U.S. senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.
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