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  • Dec 19, 2014
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Economists sound alarm as workers' share of income declines globally

Economists warn the benefits of productivity gains increasingly go to the privileged, with labour's share of national income in decline

PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Thursday, 25 July, 2013, 3:57am

Nothing lasts forever but a global trend that set in 30 years ago shows no sign of ending: a steep rise in the share of income that goes to profits and a corresponding decline in labour's slice of the economic pie.

The imbalance, which is driven by technical change, the waning clout of unions and the rise of financial markets, raises issues that are primarily political.

At what point will public opinion decide that the pendulum has swung too far towards the owners of capital? Should taxes and transfers be tweaked to redistribute income more fairly?

But the trend also feeds into an economic debate over the conventional assumption that modest wages are good for growth because they help productivity gains and hold down inflation.

Jeff Madrick with the New America Foundation in Washington argues that low wages are restraining recovery from the Great Recession and were a root cause of the financial crisis that triggered it. That is because surplus countries such as China and Germany held down wages to promote exports, thereby eroding growth and wages in deficit economies such as the US, where consumers racked up debt to sustain living standards.

The International Labour Organisation's "Global Wage Report 2012/13" says the effects of changes in the labour share on aggregate demand and incomes are ambiguous. But a presumption that wage moderation is always beneficial for economic activity would be misguided.

"The challenge is to strike a balance between wages and profits and between household consumption, investment and exports. The idea that you simply cut wages and growth will follow is a simplistic one," said Patrick Belser, an economist with the Geneva-based UN body.

If in the name of competitiveness ... you just compress wages constantly, you also kill demand
Laszlo Andor, ILO ECONOMIST

Indeed, while indebted countries on the rim of the euro zone need to put their house in order, officials are coming around to the view that deep cuts in real wages can be self-defeating. "If in the name of competitiveness and internal devaluation you just compress wages constantly, you also kill demand and you can kill the recovery," European Employment Commissioner Laszlo Andor said.

According to the ILO, labour's share of national income in 16 developed countries dropped from about 75 per cent on average in the 1970s to 65 per cent just before the financial crisis.

The mirror image of the decline in workers' compensation is an increased share for capital, or profit. Labour productivity has increased more than twice as much as average wages since 1999, the ILO says, and the surplus is going to the owners of capital, notably via higher dividends.

"This is an enormous upheaval in the distribution of income in the global economy, and it has happened in an almost continuous straight line over the entire period," Gavyn Davies, former chief economist of Goldman Sachs, wrote in a blog.

What makes the shrinking labour share even more remarkable is that the trend is evident across industries and in rich and poor economies alike. The labour share of China's GDP dwindled to less than 50 per cent in 2008 from nearly 65 per cent in 1992. Globally, the labour share rebounded during the recession due to a slump in profits but the decline has since resumed.

"There are no signs that tell us that anything has changed," said Andrea Bassani with the Organisation for Economic Co-operation and Development in Paris.

The OECD attributes 80 per cent of the shrinkage in the labour share to growth in productivity and capital deepening made possible by new information and communication technologies. These have led to unprecedented advances in innovation and production processes that boost productivity. Workers are also being replaced by machines, especially in routine jobs.

By contrast, the ILO estimates 46 per cent of the fall in the labour share is due to global "financialisation" - the increased role played by the financial sector since the 1980s, accompanied by an emphasis on maximising short-term shareholder returns.

Put differently, capitalists have been calling the shots since Ronald Reagan and Margaret Thatcher championed financial deregulation. Workers have been politically powerless to resist, their bargaining strength sapped by globalisation. One question is whether the post-crisis re-regulation of the financial sector augurs a broader reassessment of how societies distribute income - especially as an ever-greater proportion of falling labour income is going to a few very high earners.

Germany is debating whether to introduce a minimum wage, while Switzerland passed a referendum in March imposing strict controls on executive pay.

"Where has the economic growth gone over the last 15 years?" Belser asked. "It's gone into the remuneration of the top 1 per cent of earners and the owners of capital."

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