Labor's Falling Share, Everywhere

[tjscott0]

I thought this very interesting.

CONVERSABLE ECONOMIST: Labor's Falling Share, Everywhere

>When I was getting my feet wet in economics back in the late 1970s and early 1980s, it was conventional wisdom that the share of national income going to labor fluctuated a bit from year to year, but didn't display a rising or falling trend over time. But the stability of labor's share no longer holds true. The Internation Labour Organization discusses some of the data in Chapter 5 if its Global Wage Report 2012/13 on the theme of "Wages and equitable growth." Here, I'll provide a few background charts, and then some thoughts. The ILO report summarizes some of the evidence this way:

"The OECD has observed, for example, that over the period from 1990 to 2009 the share of labour compensation in national income declined in 26 out of 30 developed economies for which data were available, and calculated that the median labour share of national income across these countries fell considerably from 66.1 per cent to 61.7 per cent ... Looking beyond the advanced economies, the ILO World of Work Report 2011 found that the decline in the labour income share was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America."

Taylor makes some key points regarding this information:

What can be said about this pattern of a declining labor share?

1) When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too. Looking for a "cause" based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point. The same is true of looking for a "cause" based in policies more common in Europe, or in China.

2) The causes are still murky, but one possible answer can be pretty much ruled out. The declining labor share is not caused by a shift from labor-intensive to more capital-intensive industries--because the trend toward a lower labor share is happening across all industries. The difficulty is that the other possible explanations are interrelated and hard to disentangle. They include technological change, globalization, the rise of financial markets, altered labor market institutions , and a decline in the bargaining power of labor. But after all, technological changes in information and communication technology are part of what has fed globalization, as well as part of what led to a rise of the financial sector. Globalization is part of what has reduced the bargaining power of labor.The ILO report offers some evidence that the rise of the financial sector is a substantial part of the answer. Here's a post from a couple of weeks ago on the growth of the U.S. financial sector.

3) The flip side of a lower share of national income going to labor is a higher share of income going to capital. The ILO report argues that in many countries, this pattern seems to involve rising dividend payments.

4) While understanding causes is useful, policies don't always have to address root causes. When someone is hit by a car, you can't reverse the cause, but you can still address the consequences. However, it's worth remembering that the falling share of labor income has been happening all over the world, in countries with a very wide range of different policies and economic institutions. For example, European labor market institutions are often thought of as being more worker-friendly, but they haven't prevented a fall in the labor share of income.

5) It's important to remember that the falling share of labor income is different from a rising level of wage inequality. The share of income going to labor as a whole is falling, and also a greater share of labor income is going to those at the highest levels of income. Both trends mean that those with lower- and middle-incomes are having a tougher time.

 

[clifp]

Seem to me to be an excellent example of the golden rule.
Those who have the gold make the rules.

 

[traineeinvestor]

The declining labor share is not caused by a shift from labor-intensive to more capital-intensive industries--because the trend toward a lower labor share is happening across all industries.

This is obviously wrong. A simple look at how much non-physical goods and services we consume and which require very limited labour to produce is enough to rebut this claim (e.g software). Add in that there is a lot more debt in the economy relative to GDP (which gets applied to capital rather than labour and therefore magnifies the returns to capital in a growing economy) and it becomes very hard to take this article seriously.

There was a data series that explained that (in the US ) at least part of the apparent divergence between share to capital and share to labour was being absorbed by non-wage labour costs such as health insurance and retiree benefits which have gone up a lot.

While it is likely right to say that labour's share of GDP has probably fallen, until we see some better analysis than this, it is difficult to say by how much.

 

[ERD50]

Looking beyond the advanced economies, the ILO World of Work Report 2011 found that the decline in the labour income share was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America."

I don't know, but I wonder if a different picture would be painted if we looked at 'living standard' instead of 'share'?

IOW, is the living standard in those emerging/developing countries increasing at a fairly good rate? Then those people are materially better off. Maybe a few are getting rich by setting up factories and infrastructure to support this, and that skews the averages? Beyond that, we start getting into the 'redistribution' discussions, so I'll stop there. But maybe it isn't as bleak as it may seem? And my first line really is just a question, I do not know.

-ERD50

 

[Lsbcal]

Maybe part of the problem is that we try to discuss these economic issues in terms of the short term -- recent decades. This is natural as we are really all concerned about the present and near future for ourselves and our children. However, maybe we should be remembering how much better we have it then generations going back 75 to 100 years ago, to say nothing of the age of Kings and Queens eras. Vast advances but now high expectations.

When we were on vacation in the UK we saw some examples of immigrants from southern and eastern Europe (youth unemployment at Depression era levels). You could tell by their youth and happy faces that they were seeking better opportunity where the jobs were even though these were in fairly low level positions. They are perhaps a new wave that refreshes the old ways. I'd like to think that anyway. Examples:
1) The Chinese restaurant manager in Edinburgh from Sardonia. He was a botanist that missed his garden but nothing else apparently. Loved the cool weather too.
2) The Starbucks guy with the Italian accent that had big smiles while taking our order.
3) The table clean up lady at our breakfast in a hotel that smiled and said hello each morning. She was excited to get out to a botanical garden on the weekend.

Our own son has struggled after college but perseverance pays off. He's in a good job now and I remind him to manage his expectations ... a good way to stay happy.

P.S. Maybe the good stock market has made me a bit of a Pollyanna ? Hope not.

 

[MichaelB]

It's not obvious (to me) that a declining share of labor x GDP in China or Brazil has the same negative implication compared with a fully developed economy such as US or UK.

 

[traineeinvestor]

It's not obvious (to me) that a declining share of labor x GDP in China or Brazil has the same negative implication compared with a fully developed economy such as US or UK.

It shouldn't - as economies develop they traditionally move up the value chain from low value labour intensive industries to higher value economic activities that require greater skill sets, more physical, monetary and intellectual capital etc. This is another area where the original article gets it utterly wrong.

The other basic problem is that it makes the standard Marxist mistake of assuming that one person's gain is another person's loss (i.e that the size of the economic pie is fixed) - which obviously wrong of course.

 

[eytonxav]

I don't know, but I wonder if a different picture would be painted if we looked at 'living standard' instead of 'share'?

IOW, is the living standard in those emerging/developing countries increasing at a fairly good rate? Then those people are materially better off. Maybe a few are getting rich by setting up factories and infrastructure to support this, and that skews the averages? Beyond that, we start getting into the 'redistribution' discussions, so I'll stop there. But maybe it isn't as bleak as it may seem? And my first line really is just a question, I do not know.

-ERD50

Agree, it has been my understanding that labor income share has been increasing in emerging economies. Seems to defy logic.