Labor’s declining share of the national income is related to the declining median income because most people make almost all of their income from working (labor) whereas only the very wealthy make most of their income from owning capital. When the share of income going to labor declines because the share going to the owners of capital rises, that is naturally going to reduce the median income (and potentially hurt about 90% of Americans).
Labor’s share of income has been declining since the 1970s which is also the time period that inequality has been rising, but we don’t know why labor has been in decline. Most economists have been focusing on technological change–machines substituting for labor. This means robots and machines working instead of people. Since only a few rich people can own the wages of all the machines (like slave owners of the past), inequality rises. But a recent result by Tali Kristal in one of the top journals in Sociology suggests that it is not due to technology. It is the decline in unionization. A summary:
It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor’s share of income,” Kristal said. “By contrast, in the lightly unionized industries of trade, finance, and services, workers’ share stayed relatively constant or even increased. So, what we have is a large decrease in labor’s share of income and a significant increase in capitalists’ share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers’ bargaining power, was the main force behind the decline in labor’s share of national income.
So Kristal’s work suggests that it is not a rise of machines, but a decline in unionization that accounts for the decline of labor’s share of income. Several commentators have suggested that the logical next step in this research is to look at other nations where unionization has not declined to see if they have had similar trends. This is important work in deciphering the cause of the rise in inequality since the 1970s. Some economists say that it is ‘poisonous‘ to think about inequality, and others have tried to deny that it is happening, but it is an important and neglected research topic and Kristal’s work is an important contribution that deserves folowup.