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The Value of Labor

Today’s we’ll address a very simple approach to a very complicated idea. How much are people “worth?” If you think of people simply as GDP machines, then the easiest way to conceptualize the value of people is to ask, “What is the present value of the income generated by all of the people in the United States?” The calculation is remarkably simple for two reasons.

First, we have a decent estimate of what the total income generated by workers in the United States is. The U.S. Bureau of Economic Analysis reports this each quarter in its National Income and Product Accounts. The best measure of the income produced by workers is the total compensation workers are paid in the economy. Remarkably, labor’s share of national income has been steady for the last 60 years at roughly 70%. Current GDP stands are just under \$15 trillion. Just to be conservative, let’s assume the relevant denominator is much smaller, say \$12 trillion. Then a rough estimate of how much compensation workers earn each year is \$8 trillion or so.

Second, the aggregate concept of “labor” lasts in perpetuity.

Taking one and two together, the simple way to place a “value” on the workers in the United States is to ask a question like, “If a Martian Emperor came to Earth and was able to pick the pockets of all American workers, forever, how much would he be willing to pay to secure such a privilege?” In other words, what is the value of an asset that generates \$8 trillion of income per year, every year, into eternity? Note, that the simple calculation is not even assuming that this figure will grow.

The answer? It depends on the interest rate. If the risk free interest rate in the universe is 4%, for example, then the value of an asset throwing off \$8 trillion per year is \$8 trillion / 4% = \$200 trillion. This is to say, if you have \$200 trillion sitting in the Bank of the Universe, and you were able to earn 4% on it each year, then the annual income flowing from that account would be \$8 trillion. If interest rates were lower, then the value of the pick-pocketing would be higher and if interest rates were higher the value would be lower. But 4% seems a reasonable number.

In my view of course this number dramatically underestimates what Americans “really” are worth – both in financial terms and in human terms. Perhaps we’ll write more about this in the future. But just to put this number in perspective, the most recent flow of funds reports from the Federal Reserve indicates that as of the 3rd Quarter of 2010, the total value of assets held by households and non-profit organizations was \$68.9 trillion (\$45.7 trillion in financial assets and \$23.2 trillion in tangible assets). To this you can add \$26.2 trillion in assets held by non-financial corporate businesses and \$9.9 trillion held by non-financial non-corporate businesses. Thus, a very rough guess as to the “asset value” of what is in the United States, including property, is about \$105 trillion. I think the actual number is  a real mystery, but that’s at least what the government would report if asked.

When we calculate these asset values we are only very indirectly capturing the value that American workers are contributing to them. Either that or the stock of assets in the US right now is considerably uber-productive. Why? Basically, if you want to argue that this \$105 trillion is the true stock of assets in the United States right now, and that these are all of the assets that are at our disposal to produce GDP, then the implied return on those assets is something like \$14.7 trillion / \$105 trillion = 14%. That would seem to be a very high return, and I’d soon expect to see a heck of a lot of Martian money managers buying the stock of America. Maybe the asset is far riskier than the “risk-free” model that I have in my head? Perhaps we are on the even of nuclear annihilation. Maybe we are overstating GDP? Understating the true value of the assets in America? Or I am just off – that the real market return on assets is in fact 14%.

Lot’s to chew on here, including how we can tie this into our next idea for political reform.

4 Responses to “The Value of Labor”

1. Harry says:

The feds’ sources include statistics from Form 1040, etc., but do not include the underground economy, which may lead to some big underestimates. This is an inherent problem for anyone looking for reality, let alone precision among macroeconomists. (that is a good double Scrabble bingo word.)

Thanks for keeping my mind running with your blog, even though I suspect you combine your essays with lecture prep. You can tell your department head that I would be willing to pay for my daughter, hell, for me to attend your class.

2. Harry says:

By “1040, etc., I meant to include Form 941, and all of those stupid forms I fill out from the BLS and the DOL. I am not sure whether the Census has me double-counted as a homeless person.

3. Harry says:

How does one define “labor”?

I am not trying to pose a trick question here.

The insurance company writing your workmen’s comp policy might define it one way, New York State another way, and the SEIU another way. Does the color of your hard hat determine it?

4. Yes For the united States Household net worth the difference between..the value of assets and liabilities was at an estimated..level of 58.6 trillion at the end of the third quarter of..2007 0.6 trillion dollars more than in the preceding..quarter. ….Plus for Nonfarm Nonfinancial Corporate Business the net worth was 15482.0 Billion…..Plus for Nonfarm Noncorporate Business the net worth was 6239.0 Billion…..Thats a total net worth between Business and Households of about 79.2 Trillion for the United States…..If you consider just assets and forget about liabilities – which you really shouldnt then the total for assets in the Unites States is about 110 Trillion…..Given that the United States holds my estimate 20 of the worlds net worth you could buy the entire world over 2 1 2 times with 999 Trillion…..The source is linked below…