In Economics 101 students are taught that the share of national income received by labor and capital are so stable that they are virtually constant. In empirical work published in the 1920s, the labor economist Paul Douglas
, a great liberal
and friend of labor who ultimately became Democratic Senator from Illinois,
accurately predicted GDP growth based on the growth of labor and capital—with the contributions of each equal to their respective income shares: about 75% for labor and 25% for capital. [A Theory of Production | The Estimation of the Cobb-Douglas Function: A Retrospective View, by
J Felipe, FG Adams, Eastern Economic Journal,
Douglas found that, although total employment fell during recessions, the share of income going to labor remained constant as productivity (and wages) rose for those still working. Similarly, a big hiring boom would eventually increase the productivity of capital
relative to labor, keeping income shares constant over the course the business cycle.[ "A Theory of Production", American Economic Review,
March 1928 ]
But that was in the 1920s
—a time when immigration was a non-factor
in the U.S. labor force.
Douglas would be horrified at the current state of the U.S. labor market.
Over the past four decades—and especially since 2000—the share of income paid to workers in the form of wages, salaries, and other forms of labor compensation has steadily declined:
In 1970 about 65% of business income in the U.S. went to labor.
By 1990 labor’s share dropped to 63%. Fifteen years later labor’s share had declined to 60%, and seven years after that—by 2012—it had fallen to a post World War II low of 57.6%.
The difference between 1970 and to today—about 7 percentage points of private sector income—translates to $800 billion less labor income a year, or an average pay cut of approximately $7,000 per each private sector employee.
Of course, a declining labor share means a higher share of income is received in the form of business profits
, interest income, real estate
and financial asset appreciation, and other forms of capital income. And, because capital income is distributed more unequally than labor income, the decline in labor’s share accounts for a good chunk of the widening disparity between haves and have-nots
in the U.S.
Why the shift from labor to capital? No doubt many factors play a role. Some economists blame technological change and the decline of labor unions. “Globalization
” is another prime suspect—but mainstream economists discuss it only in the context of trade and outsourcing jobs to China
and other low-wage countries Immigration is essentially never mentioned.
For example, Bruce Bartlett, an old friend from my National Review
days (although he now seems to have become a born-again liberal Democrat
), didn’t mention immigration at all in his recent New York Times
column Labor’s Declining Share Is an International Problem
June 25, 2013) Yet immigration is an issue throughout the industrialized world, whereas the decline of unions
—as Bruce admits—is very much a U.S. phenomenon.
Nevertheless, as my chart makes clear, the rise in the immigrant share of the U.S. labor force is the mirror-image of the decline in labor’s share of income.
In 1970 only 5.2% of the labor force was foreign-born. By 1990 immigrants comprised 9.3% of the labor force—a gain of about 4 percentage points. Then, in 2000, when the Bush Administration’s pro-amnesty agenda first surfaced
, the foreign-born share accelerated significantly—from that year’s 12.5% to the post WWII record of 16.1% recorded in 2012.
If immigrant labor continues growing at the pace of 2000 to 2012, the immigrant labor force will be three-times larger in 2050 than it is today. The foreign-born share of the labor force will double, to 32.7%:
|U.S. Labor Force by Nativity, 2000-2050(number in thousands)
|Projections based on average annual growth rates, 2000-2012 :
|Data source: BLS (2000, 2012.) Projections by author.
And remember, that “U.S.-born” labor force includes the native-born children of immigrants who arrived since 1965.
Never in our history have we such growth in the foreign-born (legal and illegal) share of the labor force. Pre-1965 stock Americans will be really squeezed
if the Amnesty/ Immigration Surge bill is passed.
Can labor’s share fall forever? Is such a trend sustainable? Paul Douglas thought not. So did Henry Ford. His decision to pay autoworkers $5 per day
was predicated, in part
, on the fear that ever declining labor shares would eventually shrink the market for autos.
But that was in 1914.
We were a “closed economy”
where production and demand were overwhelmingly domestic. Immigration was at a virtual standstill; globalization not even a gleam in the businessman’s eye. What was good for Ford workers was good for Ford, and vice-versa.
For years, the consensus among labor economists, as documented
in the 1997 National Research Council’s report The New Americans
, has been that economic growth caused by immigration is mostly captured by the immigrants themselves through their wages—the aggregate benefit to the native-born is vanishingly small, more than wiped out by transfer payments like K-12 education. But immigration’s biggest impact is to redistribute income
from native workers to employers.
Recent evidence confirms this is still the case. The construction industry is roaring back, home builders are again profitable—yet average construction wages have fallen between 15 percent and 35 percent across the country. That’s the result of cheap immigrant labor.
Similarly, the service industries
, hotels, motels
, cleaning companies,
, etc.—are major employers of immigrant labor. These industries
are making money, creating wealth for executives and shareholders. Yet average real wages of service industry workers
Today, U.S. immigration policy serves the needs of transnational corporate elites. They have no interest in the workers who happen to share their nationality
and work for their businesses. The Amnesty/ Immigration Surge bill is
explicitly designed to exacerbate this trend.
But why are Democrats supporting it?Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants.