Revision of the International Standard for GDP Compilation and Challenges Ahead

Part 4: Greater Accuracy Achieved in Measuring Labor's Share of National Income

Faculty Fellow, RIETI

For the past quarter century, advanced economies have witnessed a gradual decline in the labor share of the national income. How much of the decline is attributable to measurement problems or represents changes in the economic structure is subject to controversy. The labor share, which represents the share of labor income in national income or nominal gross domestic product (GDP), is an important indicator of the distribution of income within a macro economy. It is a simple indicator, but measuring it is not easy.

Labor force can be divided into two groups: the employed and the self-employed including unpaid family workers. In the case of the latter, it is generally difficult to observe labor income separately from capital income. Thus, in the System of National Accounts (SNA), the income of self-employed people is recognized as mixed income without separating labor and capital income. Therefore, any amount presented as labor income of the self-employed is an estimate based on certain assumptions.

Meanwhile, the income of the employed, referred to as "compensation of employees (COE)" in the SNA, is usually the largest component of a nation's value added or GDP. It includes not only wages and salaries in cash but also those in kind such as goods produced by their company. If employees are provided with company housing at no or reduced costs, the difference with the market rent for equivalent housing is considered as COE. Employers' social insurance contributions are included as well. Because of the presence of a large number of employees employed by small entities whose activities are difficult to measure, some developing countries do not provide any estimate of COE.

With the forthcoming implementation of the 2008 SNA in the JSNA, employee stock options will be newly included in COE. Although the treatment of employee stock options involves various issues, such as how to estimate their value and how to spread them across periods, it is expected that their inclusion will increase employee compensation by slightly more than 0.01% in JSNA. Since this is a reclassification from capital to labor income, it will not affect the size of GDP. However, it will change the labor share.

Reflecting an increase in net receipts of income from abroad, gross national income (GNI) has become a familiar concept in Japan. The value of GNI exceeds that of GDP by 4% in Japan, compared to 1.5% in the United States. The larger difference between the two indicators reflects lower returns on domestic investment in Japan. Indeed, in Singapore, which offers attractive investment opportunities, the value of GNI is about 4% smaller than that of GDP. Although the role of GNI is sometimes emphasized as an income measure rather than GDP, for the vast majority of the Japanese people, labor income generated in domestic production is the greatest source of national income. Thus, the importance of GDP as a measurement of the generation of income remains intact.

>> Original text in Japanese

* Translated by RIETI.

September 27, 2016 Nihon Keizai Shimbun

November 24, 2016

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