On Measuring the Labour Income Share

Main Points

• The careful treatment of self-employed (proprietor) income suggests there has been a decline in the UK labour income share. However, this occurred in the last quarter of the 20th century and the recovery after the millennium was modest.
• Imputing self-employed labour income via average hourly employee compensation for the UK economy should be avoided unless compelling empirical evidence states otherwise. The granular approach employed here has uncovered systematic inconsistencies in method 2 when subject to disaggregation.

The labour income share plays a key role as a parameter in macroeconomic models and has motivated a body of literature with regards to its apparent decline. Despite its crucial importance, there exists no robust consensus on how to quantify the labour income share in practice. This paper explores some of the conceptual issues surrounding measurement and provides a novel empirical application utilising UK sector level national accounts data. Specifically, this involves imputing proprietor labour income at the sector level and then aggregating up to the whole economy. This paper demonstrates that the disaggregated approach amplifies measurement errors under certain imputation assumptions.