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.