The Growing Value of Capital and the Decreasing Value of Labor

In the United States, the failure of wages to keep up with gains in productivity is a well-known phenomenon. The relative decline in wages began in the 1980s. Its cause has been attributed to growing automation and the outsourcing of work that accompanied globalization. A recent article in The Economist provides data that indicates that this is a quite general phenomenon that pertains to all developed countries and is relatively independent of social policies and labor regulations.

The article utilized OECD data from its member countries to indicate how labor’s share of the economy has fallen over the recent decades. Below are plotted labor costs as a percentage of GDP for a range of countries.

The four countries with a long history of economic development, the US, Britain, Germany, and Japan, all look quite similar from this perspective. South Korea and Mexico, more recent entries into the developed-nation category, have different starting points and different economic environments, but they also share in the decline of economic activity associated with labor. Labor’s share is falling even faster in those two nations.

The universality of this phenomenon suggests that something quite fundamental is at work; something that is inexorable and inevitable. Of the two suggested culprits, technology seems to be the dominant factor. Globalization certainly contributes, but the trends began before globalization became significant.

"The likeliest culprit is technology, which, the OECD estimates, accounts for roughly 80% of the drop in the labour share among its members."


Technology has made investments in capital more beneficial than investments in labor through ever improving ways to replace human labor with mechanical labor. The reach of labor-saving technology has moved into what were once well-paid, white-collar jobs. Computers and new methodologies have allowed for a large number of middle class jobs, as well as some professional work, to be automated or off-shored. The net effect is that economies preferentially create new jobs in lower-wage categories, and there is increasing income inequality within a country.

In the chart above, the mature economies tend to look nearly identical. However, each has provided a different response to this long-term situation by implementing social policies that supplement the incomes of the lower-wage workers by redistributing wealth. This is a noble and necessary response, but one senses that these can only be stopgap measures. It seems that a more fundamental response will be required.

We seem to be entering terrain that has been anticipated by science fiction writers for many decades. There is no real limit to the ability of capital to replace labor. It is difficult to conjure up physical manipulations that cannot be reproduced by a well-designed and well-programmed machine. There is no reason why a machine can’t perform complex surgeries more accurately and more efficiently than a skilled human. Is there logic that a human is capable of that cannot be reproduced by computer-based logic? It is not inconceivable that mankind could reach a stage where nearly all work is performed by a machine.

It seems there is a form of "the tragedy of the commons" at work here. If it is in each business’s best interests to replace labor with capital investment, then each business will benefit—but only up to a point. Economies depend on having consumers for the products produced. Technology is eliminating the jobs and incomes of potential consumers. This trend can’t go on forever. Society will have to decide how it will deal with this.

Currently, societies are organized around the notion that a person earns his keep by working at a job. This assumes that there exist enough jobs for all those able and willing to work, and that the others are in a sufficient minority that they can be cared for by the majority. What happens if this assumption no longer holds? How does an economy continue to function?

One extreme end point would have machines producing all the goods that humans need. This would require a means for distributing those goods to individuals. How complicated could that be?

Another extreme might have society stepping in and deciding to implement a full-employment policy that might severely limit the utilization of machines in supplanting labor.

At either extreme, and at all points between, the issue of population management arises. How many people does a society need? How many people can a society tolerate? At what point are there more people than can be supported?

It is never too early to start worrying about a new problem.