The worldwide decline in the labour income share is in the spotlight…
The worldwide decline in the labour income share (LIS), the part of national income allocated to labour compensation, has been the subject of considerable debate in recent months. The IMF's latest World Economic Outlook for instance reviews the causes at the root of the downward trend in the LIS, and the OECD and the ILO have recently produced comparable reports. Policymakers have expressed concern about this trend decline as it may negatively impact economic growth.
… but the methodology used remains obscured
The discussions about the fall have only touched upon the method used for measuring the labour income share itself. To measure the LIS, assumptions must be made in order to divide total self-employment income into a labour and a capital component. The internationally adopted (standard) method awards self-employed people the same average hourly labour compensation as people in employment. The difference between the total income of self-employed people and their allocated labour compensation represents their capital income. For the Netherlands, this method leads to the hardly realistic situation where the allocated labour compensation for self-employed people exceeds their total income, which implies that their use of capital is structurally loss-making (Note 1).
This is why Statistics Netherlands has adopted a new definition of the LIS. The alternative method assumes that the full income of the self-employed is allocated to labour. This has the drawback of leading to overstating the labour compensation of the self-employed, as their income also consists of a capital component. The overstatement will remain limited, however, as many of the activities of the self-employed in the Netherlands strongly resemble those of employed people. In 2016, 73% of self-employed people were one-person businesses, over three quarters of which mainly contributed their own labour and hardly used capital.
International comparison: standard versus alternative method
As is the case for the Netherlands, the standard method for measuring the LIS also leads to hardly realistic results for Germany, France, Italy, Spain and the United Kingdom. Figure 1 shows the LIS of eight countries measured under the standard and the alternative method (Note 2). In all of these countries, the allocated labour compensation for self-employed people exceeds their total income, as it does in the Netherlands. For these countries, the alternative method for determining the LIS therefore seems more suitable than the standard method.
Figure 1 - Labour income shares in different countries, based on the standard and the alternative method