A commodity super-cycle is found to have increased profits in the mining sector, while the real estate boom temporarily increased capital stocks in the sector and its weight in the total economy, according to a new report by McKinsey, which investigated why the labour share on income dropped so deeply.

Labour share is the part of national income (or the income of a particular economic sector) allocated to wages.

Globalisation, technology, and other often-cited factors may not be the main causes of a declining labor share of income in the United States.

The findings suggest that policymakers would have a responsibility to pay heed to mitigate the consequences of globalization where the changes in economic structure take place too rapidly for workers to adapt. Also, it would need to be ensured that technology works alongside human labor to make it more productive rather than substitute it.

Last year, London Business School economist Andrew Scott told E&T that there is a productivity effect of technology on the nature of work: “[as] the machine makes it more productive, the firm wants more of me”.

To counteract supercycle and boom-bust effects, actionable policies would be needed to focus on measuring ‘superstar effects’ and ensuring a competitive environment across sectors.

The analysis sheds light on the US economy because the discussion around the decline in the labour share of income would benefit finding solutions to concerns such as its contribution ‘to wage stagnation, populism, and hostility to globalisation’, according to the authors’ conclusion.

The rising power of companies over workers — whether due to the emergence of new technology, globalisation, a ‘hollowing out of labor unions’, or the process of market consolidation — may have been over-valued by some commentators, and may play a more minor role in explaining the labour share declines and stagnant wages.

While the authors’ results suggest that all of the above-mentioned factors play some part, the most powerful contributors to economy-wide lower labour share since the turn of the millennium appear to be supercycle- and boom-bust-related effects and secular rise in depreciation, notably from a shift to intangibles like software.

As for stagnant median wages, weak productivity growth is found to have a bigger impact than the declining labor share. Since the election of the current US president, the US labor share remained relatively stable in 2017–18.

The authors’ recommend that some sectors deserve more attention than others. The analysis forecasts on gross operating surplus and value-added until 2030 suggest that the labor share may benefit from a shift in economic structure toward sectors that currently display a higher labor share – such as healthcare and social work activities – and a moderate downward adjustment in economic weight of some sectors with a typically low labour share – such as real estate and coke and refined petroleum.

On the regulation side, policy makers are advised to concentrate on driving productivity growth to address wage stagnation.

The analysis also suggests it to be critical for the US economy to continue its efforts towards digitisation and to sustain strong demand and investment.

A commodity super-cycle is found to have increased profits in the mining sector, while the real estate boom temporarily increased capital stocks in the sector and its weight in the total economy, according to a new report by McKinsey, which investigated why the labour share on income dropped so deeply.

Labour share is the part of national income (or the income of a particular economic sector) allocated to wages.

Globalisation, technology, and other often-cited factors may not be the main causes of a declining labor share of income in the United States.

The findings suggest that policymakers would have a responsibility to pay heed to mitigate the consequences of globalization where the changes in economic structure take place too rapidly for workers to adapt. Also, it would need to be ensured that technology works alongside human labor to make it more productive rather than substitute it.

Last year, London Business School economist Andrew Scott told E&T that there is a productivity effect of technology on the nature of work: “[as] the machine makes it more productive, the firm wants more of me”.

To counteract supercycle and boom-bust effects, actionable policies would be needed to focus on measuring ‘superstar effects’ and ensuring a competitive environment across sectors.

The analysis sheds light on the US economy because the discussion around the decline in the labour share of income would benefit finding solutions to concerns such as its contribution ‘to wage stagnation, populism, and hostility to globalisation’, according to the authors’ conclusion.

The rising power of companies over workers — whether due to the emergence of new technology, globalisation, a ‘hollowing out of labor unions’, or the process of market consolidation — may have been over-valued by some commentators, and may play a more minor role in explaining the labour share declines and stagnant wages.

While the authors’ results suggest that all of the above-mentioned factors play some part, the most powerful contributors to economy-wide lower labour share since the turn of the millennium appear to be supercycle- and boom-bust-related effects and secular rise in depreciation, notably from a shift to intangibles like software.

As for stagnant median wages, weak productivity growth is found to have a bigger impact than the declining labor share. Since the election of the current US president, the US labor share remained relatively stable in 2017–18.

The authors’ recommend that some sectors deserve more attention than others. The analysis forecasts on gross operating surplus and value-added until 2030 suggest that the labor share may benefit from a shift in economic structure toward sectors that currently display a higher labor share – such as healthcare and social work activities – and a moderate downward adjustment in economic weight of some sectors with a typically low labour share – such as real estate and coke and refined petroleum.

On the regulation side, policy makers are advised to concentrate on driving productivity growth to address wage stagnation.

The analysis also suggests it to be critical for the US economy to continue its efforts towards digitisation and to sustain strong demand and investment.