By Evan Gao '16

During an economic recovery, a healthy labor market is crucial to GDP and economic growth. The US economy has slowly gained lost ground since the financial crises of five years ago. The ailing labor market has been on the right track, but the recent government shutdown and the threat of a government default stifled the progress it has made. These crises have helped raise the unemployment rate in the past month by three-tenths of a percentage point, the steepest rise since 2010. Furthermore, there has only been an increase of 120,000 jobs during the month of October compared to the average of 180,000 jobs generated per month over each of the first nine months of 2013. Although these effects may only be temporary since the government shutdown has been resolved, there is still a much more important problem that exists between the labor force and employers.

Up until the early 1980s, workers have consistently received an equal share of income, interest, or rents generated by the companies they work for. In fact, wages of American workers made up about 70% of GDP until this time. This stability provides the link between productivity and prosperity. If workers always get an equivalent share of this “economic pie,” then increases in average productivity would lead to growth, which would result in higher average earnings. Over the past 30 years, however, the workers’ piece of the pie has shrunk across the globe. In America, workers now make up only 64% of GDP. This declining trend is occurring in even the most egalitarian of nations, most notably Sweden and Norway.

With a rising share of national income going to the richer households and a decreasing share of national income going to the poorest 99%, the inequality gap is widening at a very fast pace. Growing inequality between the poor and rich will only incentivize workers to drop out of the labor force since productivity gains no longer translate to broader gains in pay.

Some argue that technology is to blame. Cheaper, faster, and more productive than human capital, automated machines are allowing firms to complete more and more tasks, thereby replacing human workers. Foxconn, a Taiwanese electronic manufacturing company, for instance, is scheduled to capitalize over a million robots to its factories next year.

Politicians on the left attribute the trend to profit-grubbing corporations and weak unions, while those on the right blame big government and high taxes. Economists assert that at least some of the blame is due to globalization, including trade with China.

But the solution should not include the hampering of growth of technology, trade, or the efforts of companies, as all of these options would significantly reduce economic growth. Instead, there needs to be a focus on strengthening workers through better training and education so that they can learn the technical skills to design and operate machines, and not be replaced by them. Reforms in the tax codes are also sensible possibilities. Narrowing the difference between tax rates on the income generated from capital and from labor, which is often taxed more heavily, would promote economic and job growth. As counterintuitive as it may sound, a general solution to increasing labor’s falling share of economic output would be to increase the worker’s share of capital.

Sources:http://clevelandfed.org/research/policydis/no7nov04.pdfhttp://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_192902/lang--en/index.htmhttp://www.washingtonpost.com/business/us-unemployment-rate-may-spike-in-oct-because-of-shutdown-but-increase-may-be-only-temporary/2013/11/06/40e80726-470f-11e3-95a9-3f15b5618ba8_story.html