Issues in Distribution Theory: The Measurement of Labor's Relative Share, 1899-1929

Abstract

IT is a commonplace that inadequate and incomplete data prevent a precise quantitative statement of the secular trend of functional income shares generated by the United States economy. Nevertheless, approximations are possible, and it is on the basis of an approximation that investigators such as I. B. Kravis,' and D. G. Johnson,2 have concluded that labor's relative share in national income has been increasing since the beginning of the twentieth century.3 With this trend as a premise, the fascinating task of explanation presents itself, replete with opportunities for elegant theorizing. Efforts in this direction have already been made by Kravis and Johnson, as well as by R. Solow,4 and M. Bronfenbrenner,5 among others. This paper seeks to stem the explanatory tide, as it were, by showing that the supposed shift in income distribution well may be an illusory one, resulting primarily from procedures and methodology, rather than from real changes in structure. The methodological framework within which the shift has been demonstrated is subject to attack on two general grounds. First, national income, as defined by Commerce, is an unsuitable base upon which to compute labor's relative share. Inconsistencies among the comDonents of this denominator render changes in the ratio's value over time misleading when applied to the structure of income distribution. Second, the empirical evidence itself has been distorted by the manner in which earlier income estimates have been reconciled with Commerce figures in order to form consistent series. While any set of reconciliations inevitably contains elements of arbitrariness, those which have been employed are arbitrary than is really necessary. The first section of this paper develops these particular criticisms in detail. In the second section, alternative data are presented which, it is believed, provide an improved and more meaningful measurement of the relative labor share, and which indicate a startling lack of change in that share between I899 and I929. This finding is based upon the ratio of employee compensation paid by domestic private business enterprises to the product generated by this sector of the economy. Coupled with S. Weintraub's demonstration of the stability of the employees' share in business gross product (Commerce concept) for I929-I957,6 these results contrast sharply with the JohnsonKravis finding that employee compensation rose from 55.0 per cent of national income for the period I900-09 to 67.I per cent for I949-57.7