The distribution of national income has shifted in most advanced nations over the last two decades in favour of profits and has forced workers to increase their debt levels to maintain consumption growth. This trend will only be reversed if workers can secure higher wages each year in line with the growth of labour productivity.
Answer: False
The answer is False.
The share the workers get of GDP (National Income) is called the "wage share". Their contribution to production is measured by labour productivity (output per unit of labour input).
The wage share in nominal GDP is expressed as the total wage bill as a percentage of nominal GDP. Economists differentiate between nominal GDP ($GDP), which is total output produced at market prices and real GDP (GDP), which is the actual physical equivalent of the nominal GDP. We will come back to that distinction soon.
To compute the wage share we need to consider total labour costs in production and the flow of production ($GDP) each period.
Employment (L) is a stock and is measured in persons (averaged over some period like a month or a quarter or a year.
The wage bill is a flow and is the product of total employment (L) and the average wage (w) prevailing at any point in time. Stocks (L) become flows if it is multiplied by a flow variable (W). So the wage bill is the total labour costs in production per period.
So the wage bill = W.L
The wage share is just the total labour costs expressed as a proportion of $GDP - (W.L)/$GDP in nominal terms, usually expressed as a percentage. We can actually break this down further.
Labour productivity (LP) is the units of real GDP per person employed per period. Using the symbols already defined this can be written as:
LP = GDP/L
so it tells us what real output (GDP) each labour unit that is added to production produces on average.
We can also define another term - the real wage - which is the purchasing power equivalent on the nominal wage that workers get paid each period. To compute the real wage we need to consider two variables: (a) the nominal wage (W) and the aggregate price level (P).
We might consider the aggregate price level to be measured by the consumer price index (CPI) although there are huge debates about that. But in a sense, this macroeconomic price level doesn't exist but represents some abstract measure of the general movement in all prices in the economy.
The nominal wage (W) - that is paid by employers to workers is determined in the labour market - by the contract of employment between the worker and the employer. The price level (P) is determined in the goods market - by the interaction of total supply of output and aggregate demand for that output although there are complex models of firm price setting that use cost-plus mark-up formulas with demand just determining volume sold. We shouldn't get into those debates here.
The inflation rate is just the continuous growth in the price level (P). A once-off adjustment in the price level is not considered by economists to constitute inflation.
The real wage (w) tells us what volume of real goods and services the nominal wage (W) will be able to command and is obviously influenced by the level of W and the price level. For a given W, the lower is P the greater the purchasing power of the nominal wage and so the higher is the real wage (w).
We write the real wage (w) as W/P. So if W = 10 and P = 1, then the real wage (w) = 10 meaning that the current wage will buy 10 units of real output. If P rose to 2 then w = 5, meaning the real wage was now cut by one-half.
Nominal GDP ($GDP) can be written as P.GDP, where the P values the real physical output.
By substituting the expression for Nominal GDP into the wage share measure we get:
Wage share = (W.L)/P.GDP
In this area of economics, we often look for alternative way to write this expression - it maintains the equivalence (that is, obeys all the rules of algebra) but presents the expression (in this case the wage share) in a different "view".
So we can write as an equivalent:
Wage share - (W/P).(L/GDP)
Now if you note that (L/GDP) is the inverse (reciprocal) of the labour productivity term (GDP/L). We can use another rule of algebra (reversing the invert and multiply rule) to rewrite this expression again in a more interpretable fashion.
So an equivalent but more convenient measure of the wage share is:
Wage share = (W/P)/(GDP/L) - that is, the real wage (W/P) divided by labour productivity (GDP/L).
That journey might have seemed difficult to non-economists (or those not well-versed in algebra) but it produces a very easy to understand formula for the wage share.
Two other points to note. The wage share is also equivalent to the real unit labour cost (RULC) measures that Treasuries and central banks use to describe trends in costs within the economy. Please read my blog - Saturday Quiz - May 15, 2010 - answers and discussion - for more discussion on this point.
So it becomes obvious that the correct statement is that the real wage has to keep pace with productivity growth for the wage share to remain constant. If the nominal wage (W) and the price level (P) are growing at the pace the real wage is constant. And if the real wage is growing at the same rate as labour productivity, then both terms in the wage share ratio are equal and so the wage share is constant.
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