Peter Orzag has a column today in Bloomberg about a fascinating development, the decline in labor of income: As Kaldor’s Facts Fall, Occupy Wall Street Rises.
In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital…Recent experience betrays this lesson. Over the past two decades — and especially since about 2000 — the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries…
Similar decreases have been occurring in other countries. In Germany and France, the labor share fell about 4 percent from 1995 to today, and it dropped about 6 percent in Australia and Japan during the same period. As Francisco Rodriguez and Arjun Jayadev wrote in a November 2010 paper for the United Nations, the labor share across the globe has “been subject to a consistent decline over the last two decades, contrary to the (earlier) received wisdom of a constant labor share across most regions in the world.”…
In a 2007 paper for the International Monetary Fund, Florence Jaumotte and Irina Tytell tried to parse the various causes of the declining labor share. In the U.S., the U.K., Australia and Canada, the economists concluded, labor globalization and technological change played roughly equal roles, and crucial ones at that….
The trite response to this reality is to call for more education and better training for workers, and more investments in research and development as well as infrastructure. It’s true that all such actions would help. But they take time, and even then they would probably only take some of the edge off the decline, not fundamentally reverse it…We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.
Since he mention former Roosevelt Institute fellow and friend-of-the-blog Arjun Jayadev’s research on this matter, I pinged Arjun for comments. Arjun:
I think that Peter Orszag is right to point to examining this data (the functional distribution of income) as another way to look at growing disparities in the U.S and elsewhere. Looking at labor’s share of income is difficult because of the many choices and adjustments one has to make (how does one treat self-employment? how does one treat non-wage benefits and so on). This said it appears that even taking the best adjustments we have, labor’s share is falling here and elsewhere. What was really interesting to Francisco and me was that our rough estimates suggest that labor’s share is falling within most industries in a great deal of countries across the world.
We use terms like ‘globalization’ and ‘technical change’ too easily to explain this-they are somewhat non-valent and give the sense of mysterious inevitable forces leading to this decline. A more comprehensive account should really take a look at the politics of this shift and there is some evidence for the contention that an eroded bargaining power of labor is an important factor.
For example, Minsik Choi wrote a really under-appreciated paper a few years ago where he found evidence for what he termed the ‘threat effect’ , whereby union wage premiums dropped consistently when a firm had subsidiaries to relocate production abroad. I’d also like to see more work done on the transfer of incomes to different fractions of capital. My belief is that there is an untold and complex story of financialization and transfers of income from labor to finance and not to industrial capital. So the protestors are parked outside the appropriate faction of capital (for the time being).
Another thing–financial crises dont tend to be times that restore labor’s share. Another underappreciated paper by Ishac Diwan makes this more than clear.
And check out this abstract from Diwan:
The paper investigates how the distribution of income between labor and capital is affected by financial crises. Using an international panel-data of the share of labor in GDP, three sets of empirical regularities emerge: (i) a tendency for the labor share to fall sharply during a financial crisis, recovering only partially in subsequent years; (ii) the decline during a crisis can be partly explained by the extent of leverage in the country, the nature of its financial structure, and the openness of its trade and capital regimes; and (iii) there is a secular fall of the labor share, especially marked for countries that experience financial crises, due to the fact that crises leave distributional scars, and because crises have become more un-equalizing over time. These empirical regularities suggests that labor is not simply a bystander that is hurt unintentionally by financial crises, but rather, that temporary changes in distribution can be a means by which labor partially bails out capital, and thus plays an important role in resolving financial crises.
Well that’s not good. Nothing exacerbates an already terrible debt burden than declining wages.
I’ll outsource a reply to this using Dean Baker:
“… people are told that middle class jobs are disappearing because of globalization and automation. This is not true. The reason why factory workers lose their jobs to people in developing countries rather than doctors and lawyers is that we designed trade rules to make our factory workers compete with low-paid workers in China, Mexico and other developing countries. We largely protect our doctors and lawyers from the same sort of competition.
If we had designed our trade policy to put our highly educated professionals in direct competition with their counterparts in the developing world, they would be no more successful than our factory workers. The difference is that professionals have enough political power to mostly preserve the barriers that protect them from such competition.
The over-valued dollar also worsens the situation for U.S. factory workers. If the dollar adjusted to a level that allowed for balanced trade we would have more than 4 million additional jobs in manufacturing.”
No doubt each dollar of income which they can divert from labor to capital weakens the left-leaning parties and strengthens the right-leaning ones.
And nothing feeds declining wages like busting unions…
The labor share of income elephant in the room that few people are prepared to look at are central bank (particularly Fed) policies that treat wage growth as inflationary regardless of productivity gains. If the Fed is going to scream ‘INFLATION!!!!!’ and ram up interest rates whenever wages grow by more than 1%, even when productivity grows by >2%, then of course labor share of income will decline over time.
Wages are stagnant precisely because that’s what central banks want.
I believe there is an additional important factor. If corporations were taxed at a reasonably high rate, as they were from the fifties to the eighties, they would try to avoid taxes by putting the money back in the business. One way they (used to) do this is by increasing wages. Now that taxes are low, they would prefer to take profits and then sit on those profits.
This phenomenon also encourages less investment in fixed capital and R&D. It may be that lower taxes can, at a certain point, contribute to a decline in the rate of technological progress.
Please see this recent paper in the American Sociological Review. The abstract below:
This article returns to a classic question of political economy: the zero-sum conflict between
capital and labor over the division of the national income pie. A detailed description of labor’s
share of national income in 16 industrialized democracies from 1960 to 2005 uncovers two
long-term trends: an increase in labor’s share in the aftermath of World War II, followed by
a decrease since the early 1980s. I argue that the working class’s relative bargaining power explains
the dynamics of labor’s share, and I model inter- and intra-class bargaining power in the
economic, political, and global spheres. Time-series cross-section equations predicting the
short- and long-term determinants of labor’s share support most of my theoretical arguments
and the main findings are robust to alternative specifications. Results suggest that the common
trend in the dynamics of labor’s share of national income is largely explained by indicators for
working-class organizational power in the economic (i.e., unionization and strike activity) and
political (i.e., government civilian spending) spheres, working-class structural power in the
global sphere (i.e., southern imports and foreign direct investments), and indirectly by an indicator
for working-class integration in the intra-class sphere (i.e., bargaining centralization).
Mik,e thought you might be interested, a while back I pulled the labor/wages share for 1919-1931:
I think Baker is right and trade is part of it, but mostly agree with Yglesias. The last time the labor share went up was in the late 90s under Clinton/Greenspan. Wage rose alongside productivity increases. The labor market was tight and workers were in a better negotiating position.
I’m glad you posted a link to the paper outlining the “threat effect.” I know this is anecdotal, but when I started working for a retailer over 18 years ago we were told that the company paid union wages so it didn’t have to worry about unions. The company actually did at time. Fast forward to today; the company pays wages that guarantee most of it’s work force can’t even buy the products the company sells. Most of the employees are working poor that have to hold down multiple jobs to make ends meet. These are the conditions despite the fact that the company went from an unknown to listed on the Dow Jones Index and has billions of profits. What changed in my mind is the decimation of power that labor once held, and the rise of right to work states.
As labor share and wages fall, social mood stirs. I touched on this at http://www.seeitmarket.com and think Western leadership needs to understand the quickly evolving mood/sentiment. It’s not so much the exact message as it is the tone and movement.
Bush tax program advantaged capital over labor.
This was a fantastically informative post, connecting many of the dots
I would like to explore the differential characteristics between financial and industrial capital, and how they differentially interact with Labor under various circumstances, such as financial crises, levels of financialization,etc
I was especially intriuged by this quote from Arjun:
“My belief is that there is an untold and complex story of financialization and transfers of income from labor to finance and not to industrial capital”
This untold story needs to be explored and told
Got Inspired last night and put together a post on this topic!
Thirty years of wage destruction – and now everyone finally notices!
* In the culmination of a 30 year policy of social engineering and deliberate wage destruction, Labor vs. Capital shares of national income have reached multi-generational lows
* Labor’s share of income has been in secular decline since 1980, with each cycle seeing lower peaks, steeper drops, and milder recoveries than the prior cycle
* A tiny elite “vanguard” (aka the 1%) has now achieved a level of centralized economic control that would make Lenin blush
* 30 year policy of wage destruction coupled with financial asset inflation produced a “growth mirage”
* The system may be hitting a kind of “Paradox of Reverse Fordism”, where actions (cutting costs) that are rational for one actor are counterproductive if implemented by all actors
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