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Lousy Metric for U.S. Workers May Be Less Worrisome Than Thought

Lousy Metric for U.S. Workers May Be Less Worrisome Than Thought

(Bloomberg) -- The decline in U.S. labor’s share of the economic pie since the turn of the century may be less worrisome for workers than the numbers suggest, according to consultants McKinsey & Co.

That’s because a portion of the drop is “technical’’ and stems from increased business investment in such products as software and databases, which depreciate quickly but also can boost lagging worker productivity and wages over time.

Lousy Metric for U.S. Workers May Be Less Worrisome Than Thought

“The fact that companies are doing that is quite clearly a good thing,’’ James Manyika, chairman of the McKinsey Global Institute, the firm’s research arm, said in an interview.

In a 62-page report out Wednesday, the institute also concluded that globalization, automation and the declining clout of labor unions have played smaller roles in the fall in workers’ share of national income than is widely believed.

And it speculated that labor’s cut will continue to decline in the future, albeit at a slower pace as the economic benefits of outsourcing wane.

The drop in labor compensation as a share of gross domestic product is a big deal. If it had held at the same level as 1998, average worker pay might be roughly $3,000 per year higher today, according to McKinsey.

The report found that about a dozen sectors of the economy, constituting around one-third of employment, accounted for the bulk of decline in labor’s share since about 2000.

Automation Impact

At the top of the list: the wholesale and retail industries where automation has led to consolidation and allowed companies to squeeze workers’ wages.

Other industries with outsize drops in labor’s cut include real estate, telecommunications and transportation.

The institute said the biggest reason for the fall in workers’ slice of the economic pie since the turn of the century was super-cycles and boom-busts that are unlikely to be repeated anytime soon. They deflated labor’s share because they occurred in capital-heavy industries such as oil and gas and construction.

The second largest is depreciation, which was responsible for about a quarter of the drop in labor’s take. But its impact is “more technical than distributional,’’ the report said.

That’s because depreciation, which reduces corporate profits, is not accounted for in the calculation of GDP. That effectively lowers labor’s share of national income while inflating capital’s.

The rise of so-called superstar firms with hefty profits in technology and other industries has also depressed the proportion of income going to workers, McKinsey said.

“Looking ahead, our analysis might suggest that the labor share decline could be dampened but continue,’’ the institute concluded.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Scott Lanman

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