Mitchell’s Musings 8-7-2017: The Sources of Discontent

Mitchell’s Musings 8-7-2017: The Sources of Discontent Daniel J.B. Mitchell I recently came across an article dealing with “labor’s share” of the GDP which looks at that measure’s decline since the 1980s.1 The authors find that the decline has to do with the rise of certain industries in which the share is low and in which a few firms dominate. Think of Apple which can charge a lot for products it makes (mainly abroad and for far less than the retail price). One presumes this renewed interest in labor’s share is connected with the larger issue of income inequality and even to the political consequences thereof, although that is not the explicit subject of the article.

Labor’s percentage share of some measure of national product or income - such as GDP - was said to be surprisingly constant when I went to graduate school in the mid-1960s. Of course, “constant” is in the eye of the beholder, and “constant” really meant trendless. It was known then that the business cycle affected labor’s share. Specifically, there was a countercyclical effect; the share of labor grew in recessions due to the high sensitivity of profits to downturns.

In any case, I decided to take a look at labor’s share of GDP from the end of World War II to the present (2016) for this musing. Chart 1 below shows the result. Labor’s share was higher in the 1980s than it is now, but the measure has bobbed about. If we look at the post-Korean War numbers from the 1950s, it was a bit above where it is now: around 55% then as opposed to 53.6% in 2016. Note that the postKorean War period in the 1950s is today painted as the Golden Age of manufacturing employment. It is seen as the kind of employment market that was good for the white males who are now commonly depicted as disgruntled Trump supporters.

--Chart 1

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David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” American Economic Review, May 2017, pp. 180-185.

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Labor’s share shot up (if “shot up” is the right phrase) to around 58% in the late 1960s and early 1970s, amidst a wave of strikes, pay increases, and – ultimately - wage-price controls. Commentary at the time talked about a worldwide wage explosion.2 The share popped up again around the time of the dot-com bust at the turn of the 21st century, and then generally declined. But, as noted, it’s not much below the Golden Age level today. So I have a hard time connecting the share, taken by itself, to contemporary political discontent. Indeed, the general concept of income inequality may not be as connected to political developments as many think.

I don’t think Trump supporters, or American voters more generally, are hung up on income distribution and measures of inequality, as long as things are going OK for them within their reference spheres. The lifestyles of the rich and famous are something that is seen on (un?)reality TV. But their share of the income pie is not seen as a take-away from ordinary folk. After all, Trump is a rich man. And so was Franklin Roosevelt. But both were elected president.

Chart 1 above also shows another index, the employment-to-population ratio. It seemed about as constant in the post-World War II period as labor’s share, maybe more so, but then took off in the late 1960s. It rose with only cyclical interruptions throughout the rest of the 20th century, and has now fallen back to the levels of the 1980s.

--Chart 2: Prime age participation rate (age 25-54) – Both sexes

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William D. Nordhaus, “The Worldwide Wage Explosion,” Brookings Papers on Economic Activity, 1972, No. 2, pp.

431-464.

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When we take out some of the cyclical effect by using participation rates, and focus just on prime working ages (25-54 years), even during the Golden Age, participation was rising, as Chart 2 above indicates. The rise is due to the increase in working women entering the labor force. Contrary to popular belief, although there certainly was a temporary blip up in female participation during World War II (Rosie the Riveter, etc.), the growth in female participation has been a much longer-term trend.

However, in the Golden Age, there did not seem to be any effect of more women on male prime age participation. The female rate went up; the male rate was flat. But by the late 1960s, the male rate began to decline. You can argue as to whether women were “displacing” men then or thereafter. But you had manufacturing decline, more women in the workforce, and declining male participation, all at the same time. Other developments affecting women arose along with these developments ranging from birth control, eased divorce laws, women’s “lib,” inclusion of sex discrimination in Title 7 of the Civil Rights Act, etc.

You also had changes in immigration laws in the 1960s and then pressure from economic crises in Mexico that led to an increase in the proportion of Latinos in the workforce. Desegregation began for real in the south in the 1960s, as did urban riots in the north. By the 1970s, in reaction, there was the socalled “silent majority” of voters. By the 1980s, there were “Reagan Democrats.” In short, the political developments then and now seem more connected to demographic changes, broadly defined, than to labor’s share, income inequality, etc.

It’s no accident that the “red states” keep trying to restrict abortion (identified with feminism) or that the Trump campaign and now the Trump administration had/has a focus on immigration issues. Antiaffirmative action has been recently added to the list. These topics are all issues that connect to women and others in the workforce. Again, you can argue whether there was true “displacement” by the newcomers to the workforce, but there was correlation: more of “them” came along; fewer Good Jobs remained. It’s not clear (to me) that Democrats are well-positioned to counter the pressures that created the Trump phenomenon. In fact, they are identified with the very complaints that led to Trump’s election. Free community college doesn’t do speak to the resulting disgruntlement as a campaign issue. Single-payer health care doesn’t do it. Sanctuary cities don’t do it.

A recession would, of course, importantly change the dynamics of the upcoming elections. But as we have noted in a prior musing, there is no sign at present of a recession that might occur in time for the 2018 midterm election, although nothing is impossible. Democrats might pick up some seats due to Trump’s low favorability ratings, but getting control of either house seems a stretch. As for 2020, if there is no recession, there remains the Russia thing, and who knows how that might evolve?

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Chart 3: Prime age male participation rate (age 25-54)

--Chart 4: Prime age female participation rate (age 25-54)

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