The Value of Labor Over Time Is Still Increasing Over Time, Even Since the 1980s

As time moved forward, early economists increasingly appreciated the value added by the labor component. In the mid-1700s the physiocrats (like Turgot) thought that the value of land was pretty much the whole story, then a few decades later Smith recognized labor as an equally important component, and a half century after that Marx overshot the mark a bit when he argued that labor was the most important part of the story.

But each position was more correct in its own time, because the value-adding power of labor did increase over time. Economists have wondered why modern capitalism didn't develop in stable earlier market economies like ancient Rome, and the best argument so far is that the institution of slavery meant labor was cheap. As technology improved, so did the value-adding power of labor, and as labor became more valuable, the incentive to develop more technology to amplify labor also grew, in a virtuous cycle (see more about reinforcement cycles in complex systems here.) It's therefore not a surprise that the institution of slavery ended shortly thereafter, first in Britain, and later elsewhere. They couldn't afford to waste labor any longer![1] It's also telling that the natural experiment called the American Civil War - divide a country in half, one half has slavery, one half doesn't - which one develops its industry - and therefore wins when the two collide in war? It also makes sense that the least developed economies would be the ones most likely to persist in permitting slavery, e.g. Mauritania.

Many economists have also argued that starting in the early 1970s, the West had a technological and/or economic stagnation, and showed that the share of labor in the economy has been declining since then. The worry is that enough capital has accumulated that it has overtaken labor as the most meaningful input, and did not do so earlier because of world wars. This dominance of the capital component is the central concern of Piketty's Capital in the Twenty-First Century, in which he describes the growing divide between those who rely on income (most of us) and those who rely on capital accumulation (the very rich.)

But it's quite natural to wonder whether a lot of the return to labor is hidden, for instance in the accumulated wealth of high-value laborers - i.e., I don't think Peter Thiel or Bill Gates worry about their salary. This is why a new paper by Eisfeldt, Falato and Xiaolan (h/t Marginal Revolution) is very encouraging. Taking into account equity awarded as compensation to highly skilled labor, the apparent decline in labor share evaporates.

I would expect that there is still further hidden value accrued to labor and this paper has found only part of it.


[1] As a pointed aside: For those who point out (correctly) that most abolitionists were Christians and claim that the end of slavery was driven by morality rather than materialist considerations: the tacit acknowledgement of slavery in the Bible a big problem for this hypothesis, let alone the whole history of Christianity before the Enlightenment and industrial revolution when Christians had eighteen centuries to figure out slavery was wrong, but did not.