A new IMF study of the downward share of labour income is some more recognition by the elite of a major economic and social issue of our time. With the swing against globalisation, rising nationalism or nativism, it has taken time for those in power to wake up to inequality.
Inequality, which is the focus of TASC, is the biggest economic and social issue of our time. The decline in labour’s share of national income is a powerful indicator of the issue.
Declining labour share of national income
The labour share of national income – total earnings for all employees and self employed in an economy - had been around 75% of that national income in the 1970s, with the other 25% going to the owners of capital. It has fallen to 65% according to the ILO (and is lower in some countries, including Ireland). OECD has the fall from 64% to 59% in the period, but the IMF paper, while having the share falling too, it's from a much lower 55% of national income to 50% (for advanced countries).
The reasons for the decline in labour’s share of national income and the huge rise in the share going to the owners of capital and a small elite of employees within the labour share (which inflates that side) demonstrates the effects of major technological change, of globalisation, offshoring, loss of union power, etc. The reasons for the decline also point us to many policy solutions to inequality - the biggest cause of alienation today.
It took time for the IMF and indeed the OECD and other elites to finally recognise rising inequality. At last they talk about the need for “inclusive growth" but it is too often a homily. Their solutions are weak.
Vic Duggan in the last Progressive Economy blog pointed to this IMF study where chapter 3 focuses on the decline in labour share of national income. It found that “In advanced economies, labor income shares began trending down in the 1980s, reaching their lowest level of the past half century just prior to the global financial crisis of 2008–09, and have not recovered materially since.”
Interestingly the IMF now admits that “inequality can fuel social tension” and at last it also admits that “recent research suggests that it can also harm economic growth". Thus inequality will impact even on the elite.
The study says that inequality is rising for two reasons. First is that “within the workforce, lower-skilled workers have borne the brunt of the fall in labor share.” “Second is that capital ownership is typically concentrated among the top of the income distribution.”
Impact of technology and globalisation
The report found that two leading explanations for the downward trends in labour shares: the rapid advance of technology and the globalisation of trade and capital, but it says there is broad consensus that, “notwithstanding the considerable adjustment costs these forces have imposed on some groups of workers, both trends have contributed strongly to overall growth and prosperity worldwide as well as to income convergence in emerging market and developing economies.” It argues correctly that “the rise in inequality in some emerging market economies must also be viewed in the context of rising income levels for those at the bottom of the income distribution.”
Its analysis finds that technology contributed about half to the decline in labour share. The reason they say is that the owners of capital are replacing labour with machines and technology because of “the steep decline in the relative cost of investment goods”.
Tax wars between sovereign states have helped push down the cost of capital as it is increasingly taxed at lower rates. IMF says “changes in policies (such as declining corporate income tax rates) may have strengthened incentives to substitute capital for labor”.
It finds that the rapid advance in “information and communications technology, which underpins much of the decline in the price of investment goods, has lowered labor shares by encouraging the automation of routine tasks.”
Decline in union membership
Another reason for the decline in labour’s share is the decline in union membership, anti-union laws, anti-union action by increasingly powerful and at times, oligopolistic firms, and the threat of outsourcing where there are unions. The study concedes that “while changes in institutional arrangements (such as unionization rates) may have contributed to the decline in labor’s share of income by lowering labor’s bargaining power.” I think “may have” can be switched to simply “have.”
The study found that “between 1991 and 2014, the labor share declined in 29 of the largest 50 economies; those 29 economies accounted for about two-thirds of world GDP in 2014. Across industries, labor income shares have declined in 7 of the 10 major industries, with the sharpest declines occurring in the more tradable sectors, such as manufacturing, and transportation and communication.”
The IMF study also found “The decline in labor shares driven by technology and global integration has been particularly sharp for middle-skilled labor.” It also found that the decline in the labor share of income between 1993 and 2014 results from within-industry declines, rather than a shift from high-labor-share sectors to sectors with relatively lower labor shares.
Interestingly the chapter found that in “35 advanced economies, between 1991 and 2014, the labor share declined in 19, which accounted for 78 percent of 2014 advanced economy GDP, and rose or remained relatively stable in the remainder.” The information on which countries gain and lost is hard to read in graphs.
Ireland is here as one of the leading declines, but our data is so distorted (with transfer pricing by MNCs) that it is difficult to analyse.
I pointed this out in my 2013 paper on this subject of the decline of the labour share in national incomes. I analysed over ten reason for the decline and agreed that technological change was a major factor also with globalisation plus the reduction in labour’s bargaining power and financialisation. This is featured here but not as strongly as it should.
The IMF study did find that fewer barriers to the mobility of capital across borders, particularly foreign direct investment, “may also play a role in labor share dynamics.” This happens through two distinct channels. “First, by facilitating the relocation of production to countries with cheaper inputs, capital mobility lowers labor’s bargaining position. Second, by increasing access to capital, financial integration lowers the cost of capital in capital-scarce countries, facilitating capital deepening and potentially inducing greater substitution of capital for labor.”
Finally, the conclusions in this IMF study are really disappointing. It calls for the usual up-skilling and life long learning but nothing on redressing the imbalance of power to labour and away from corporations and capital. It seems to admit this inadequacy, saying “these policies are, however, unlikely to be sufficient.”
Fat lot of good this is to the millions of mid-skilled workers losing their good jobs in this increasingly unequal world.
Governments in many states talk about “fairness” take the odd step in the right direction, but refuse to equality proof every policy measure, in every department. Without such actions on every front, inequality will continue to rise because the forces driving it are so big.
Rising inequality is not leading to progressive politics, but to nationalism, xenophobia and bad politics. The Right is rising and on Left, the solutions too often fall into impractical on one side, or liberal on the other. Evidence-based analysis, combined with old progressive ideas point the way forward.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.