Labor share
The wage share is the ratio between compensation of employees (according to the system of National accounts) and one of the following variables:
- gross domestic product at market prices
- gross domestic product at factor cost.
- net domestic product at factor cost (domestic income at factor cost)
In order that the wage share reflects only changes in relative incomes and not changes of the composition of employment in employees and number of self-employed, often an adjustment is made. In this case the adjusted wage share is:
compensation of employees per employee
divided by one of the following:
- gross domestic product at market prices per number of persons in employment (this adjusted wage share is also called real unit labour costs).
- gross domestic product at factor cost per number of persons in employment
- net domestic product at factor cost (domestic income at factor cost) per number of persons in employment
The wage share is a (rough) indicator for the distribution of income between capital and labour. In the short term it moves countercyclically to the business cycle.
Criticism
The main criticism of the wage share concept is simply that it does not accurately describe the share-out of income between employers and employees. The reason is that the incomes included in the ratio are those which conform to the concept of value added.
Compensation of employees is not the same as the disposable real income that workers get, and Operating surplus is not the same as real profits realised by enterprises. Consumption of fixed capital, another component of GDP, is measured at economic depreciation rates, which may diverge from real income obtained from depreciation write-offs. Finally, the indirect taxes net of subsidies included in GDP are only those which are regarded as direct imposts on production. In summary, GDP only very selectively measures total income flows - disregarding transfer income, property income and capital gains, land rents, subsoil rents and a fraction of net interest. As a result, the value of the share of wages in the product may be overstated, particularly if taxes on consumption increase as well.