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THE WORLD'S SALARY CAP: Labor's Share of GDP Across the Globe...

Here's some deep thoughts for today.

If you're a professional sports fan, you know all about the concept of a salary cap, which is defined by Wikipedia as follows in sports:

In professional sports, a salary cap (or wage cap) is an agreement or rule that places a limit on the amount of money that a team can spend on players' salaries. It exists as a per-player limit or a total limit for the team's roster, or both. Several sports leagues have implemented salary caps, using it to keep overall costs down, and also to maintain a competitive balance by restricting richer clubs from entrenching dominance by signing many more top players than their rivals. Salary caps can be a major issue in negotiations between league management and players' unions, and have been the focal point of several strikes by players and lockouts by owners and administrators.

So what? The concept of a salary cap can be transferred to the business world in a couple of different ways:

1--Your company has a salary cap.  It's called the headcount budget, and the cap is all the budgeted money in that headcount budget.

2--Countries across the world don't have a salary cap, but they have something close - it's called Labor's Share of GDP.

What is Labor's Share of GDP?  It's defined as the following:

The wage share can be defined in various ways, but empirically it is usually defined as total labor compensation or labor costs over nominal GDP or gross value added.

The wage share is countercyclical; that is, it tends to fall when output increases and rise when output decreases. Despite fluctuating over the business cycle, the wage share was once thought to be stable, which Keynes described as "one of the most surprising, yet best-established facts in the whole range of economic statistics." However, the wage share has declined in most developed countries since the 1980s.

So add up all the compensation to labor, compare it to Gross Domestic Product (a measure of a country's economy), and you've got Wage Share/Labor's Share of GDP.  Which also serves as a floating salary cap of sorts for your country.

It's interesting to note that Wage Share/Labor's Share of GDP goes up and down and has been falling since the 80's in developed countries.  Take a look at these graphs from France, the UK and the USA from a paper on Labor Share in the G20:

Labor share

If you look at those graphs, you'll see the history of Labor share in those 3 countries, which also gives you some history to which national economies have endured the most change, which economies have a bigger safety net for labor in the midst of global change, etc.  France started at an 80% labor share of GDP and after a brief dip, is right back there.  The UK and the USA started a similar places, but safety nets in the UK have held the line lately at a 70%+ labor share, while the USA is in a bit of a free fall towards a 60% labor share.

Is that healthy for the USA?  Gordon Gekko would say yes, but rational, normal people would have to say no.  Thinking about all the changes that have occurred in our economy - global outsourcing, offshoring, tech deployment in place of human capital - and it's clear that we've been one of the most aggressive developed countries in those areas, and that's left our labor force with a much smaller share of our GDP, and likely has widened the gap between the "haves" and "have nots".

Note - I'm a moderate republican.  I'm not hating on the fact that America has less regulation than other countries - but - this type of change related to Labor Share of GDP has consequences for any economy/society over time.  You can't ignore that and it's worth being educated about the differences.

So America has a salary cap of sorts - call Labor's Share of GDP.  It's not a hard cap, it's been falling for a time and when you think about it from a sports perspective, it basically means this - in America, a higher percentage of the money in the economy goes to owners of capital rather than employees.

By the way, if you're wondering what labor's share of revenue (salary cap) is for American professional sports, a quick scan shows 47% in the NFL and 53% in the NBA.  Major League Baseball doesn't have a salary cap.

Mommas, don't let your babies grow up to be Cowboys - or unskilled labor.

Comments

MattL

Yeah, the libertarian in me says "stop socialism and crony capitalism, and it will all work out", but the pragmatist in me doesn't like the writing on the wall. Some folks argue for a UBI, Universal Basic Income or a negative income tax. Want to see some people lose their mind? Go to a libertarian blog (Cato, Reason, ...), throw up those graphs and say

"Milton Friedman advocated a minimum guaranteed income and negative income tax".

Then get out the popcorn.

--Matt

AC

Some food for thought - has the influx of cheap labor from South America affected this number for the US? Positively or Negatively? Will the hastening of automation to replace low-skill or no-skill jobs affect this? Again - positively or negatively? Has the shift of manufacturing jobs overseas affected this? There are a lot of variables and I don't know the answer. Having been to France and the UK (both great places), I'd still choose the path the US is on.

Jon

Not to be a pedant, but the scale of the US chart is very different from the other two - it encompasses just 15 percentage points on the Y-axis, where the other two countries' Y-axes encompass 40 percentage points. Shown at similar scale, the "free-fall" in the US looks a lot less dramatic.

But totally agree with your point that one would expect more overall returns to accrue to capital vs. labor as technology eats the world, and one would expect that to happen faster in countries with fewer regulatory controls against the process.

Question: is it "different this time" or not? The last few times technology disrupted labor, everything worked out ok (great, actually). I tend to bet against things being "different this time" when it comes to economic trends, social trends, etc. But the stakes are high here. Who knows...?

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