What causes the share of labor to decrease? 3 graphs.

May 1 used to be labor day. The income share of labor is falling all over the world, according to the ILO. Its Global Wage Report 2012/21013 states (emphasis added),

This shift in income distribution has taken somewhat different forms in different countries. In the Anglo-Saxon countries a sharp polarisation of personal income distribution has occurred, combined with a modest decline in the wage share. In particular top incomes have increased dramatically …. In the USA for example, the top 1per cent of the income distribution increased their share of national income by more than 10 percentage points. In continental European countries functional rather than personal income distribution has shifted dramatically. In the Euro area, wage shares have decreased by around 10 percentage points of GDP (Stockhammer 2009), but personal distribution has remained comparably stable and often has not changed in the same way as in the USA (OECD 2008, 2011). For example, in Germany personal income distribution was stable until the mid-1990s and thereafter the bottom of the distribution lost ground; in France personal income distribution among wage earners has become more equal. While  these developments appear rather different at first sight, they share the common trend that the share of non-managerial wage earners in national income has decreased sharply. The increase in inequality in the USA is, to a significant extent, driven by changes in the remuneration of top managers, whose salaries and bonuses are counted as labour compensation, i.e. wages, in the National Accounts. If they were counted, in the spirit of 19th century Political Economy, as part of profits, trends in the USA and in continental Europe would look rather similar.

Is this mainly caused by technological change? Or by cheap chinese labor? Less protection of workers because of neo-liberal policies? The ILO estimates the world-wide fall of the labor share (graph 1 and 2) and tries to explain this using four variables (and a whole bunch of specifications of these variables): globalisation (cheap chinese), technological development (better education and health, more productive methods, machines and materials, advanced on the job learning, new products, a shift towards technologically advanced sectors), the shrinking of the welfare state and: financialisation, defined as:

An increased role of financial activity and rising prominence of financial institutions is a hallmark of the transformations of economy and society since the mid-1970s. These changes are often referred to as financialisation and include rising indebtedness of households, more volatile exchange rates and asset prices, short-termism of financial institutions, and shareholder value orientation of non-financial businesses (Erturk et al 2008, Stockhammer 2010). Financialisation has had two important effects on the bargaining position of labour. First, firms have gained more options for investing: they can invest in financial assets as well as in real assets and they can invest at home as well as abroad. They have gained mobility in terms of the geographical location as well as in terms of the content of investment. Second, it has empowered shareholders relative to workers by putting additional constraints on firms and the development of a market for corporate control has aligned management’s interest to that of shareholders (Lazonick and O’Sullivan 2000, Stockhammer 2004). Rossmann (2009) illustrates this with reference to private equity funds, which buy firms by way of debt that is transferred to the firm. The surplus is siphoned to the private equity fund through dividend payments or fees. The restructured firms then are heavily burdened with servicing their debt and have little alternative to pursuing an aggressive cost-cutting strategy.

Graph 3 below shows the contributions of these factors, technological development actually has a positive effect. And guess what the main culprit is.

Figure 1. Adjusted wage shares in advanced countries, Germany, the USA and Japan, 1970-2010, % of total income (see the report for more details)

Figure 2. Adjusted wage shares in developing countries, 1970-2010, % of total income

Note: DVP3: unweighted average of Mexico, South Korea, and Turkey; DVP5: unweighted average of China, Kenya, Mexico, South Korea, and Turkey; DVP16: unweighted average of Argentina, Brazil, Chile, China, Costa Rica, Kenya, Mexico, Namibia, Oman, Panama, Peru, Russia, South Africa, South Korea, Thailand, and Turkey

It turns out that (emphasis added):

We have found that globalisation, i.e. increased international trade, has negative effects on the wage share in advanced as well as in developing economies, which is in contradiction to the Stolper-Samuelson Theorem. Overall, the results are similar for advanced and developing economies, with the possible exception of low-income countries. Financialisation has had the largest negative effect on wage shares. Technological progress (including structural change) has had substantial effects on the wage share, but these have been positive since 1980 and can therefore not explain the decline in the wage share. Globalisation and welfare state retrenchment have had moderate negative effects on the wage share.

Figure 3. Contributions to the change in the wage share for all countries, 1990/94-2000/04, by estimation
method (for the methods: see the report)