A falling wage share in national income, which has been a characteristic trend in many nations over the neo-liberal period, does not guarantee declining real standards of living for workers.
Answer: True
The answer is True.
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 that is regularly used in the media - 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 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.
So the proposition in the question - that a declining wage share does not mean the real standard of living for workers is falling - true.
Irrespective of what happens to the wage share, as long as the real wage is rising, material standards of living will be rising (other things equal). That is, a declining wage share per se doesn't denote a decline in workers' living standards.
What it tells us is that a rising proportion of national income is going to profits (non-wages). But that rising proportion could be in relation to an overall expanding pie.
A declining wage share is consistent with growth in the real wage which is slower than the growth in labour productivity. If the real wage is growing but labour productivity is growing faster, then the wage share will fall.
A declining wage share driven by a real wage falling (and labour productivity at least not falling by as much) would signify a decline in living standards but that is because the real wage is falling.
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