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

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)

Afbeelding1

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

Afbeelding2

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)

Afbeelding3

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  1. May 1, 2013 at 7:33 pm

    I would like to see a graph which depicts, what I would say, is the increasing share going to the owners of land and natural resources.

  2. May 1, 2013 at 7:34 pm

    That the share of production going to labour will fall as the use of technology increases is precisely in accordance with the predictions of Henry George in “Progress and Poverty”, published in 1879, and also with Ricardo’s Law of Rent.

    What is referred to above as “financialisation” is in fact the capture of land rental value by private and institutional owners. If the measures proposed by George are not put in place, this is going to end badly.

  3. May 2, 2013 at 12:08 am

    You need to debunk the argument (if false) that the share has decreased, but the overall cake has increased, so that everyone is better off – the neoclassical, free-market view.

  4. May 2, 2013 at 11:09 am

    Of course, the level of inequality is disgusting and wages should be increasing much more quickly but I cannot see how your analysis demonstrates this.

    GDP was intended to measure the value of domestic production. The direct cost of all production within a nation is the solely the cost of the labour to produce it. Even Adam Smith and Karl Marx agreed on that. The cost of domestic production is therefore the sum of the gross wages paid to the employees of the firms that produce it. The value of this production is this cost plus firms’ profit. Profit is typically between 5% and 10% of this cost. Wages therefore represent more than 90% of the value of production.

    I believe that your analysis merely shows the folly of the computation of GDP which now includes a vast amount of income and expenditure (largely by government) that is included for the second and, some of it, for the third time over.

    • May 2, 2013 at 12:54 pm

      Both Smith and Marx recognised that there is a third factor of production: land. Economists’ amnesia about this is the cause of much of our troubles.

    • May 2, 2013 at 1:35 pm

      Labour is NOT a cost of production. Wages are a SHARE of production. The other shares go to capital, rent of land and tax.

      The costs of production are raw materials and energy.

      The notion that wages are a cost of production is one of the two great economic fallacies of the age. The other great fallacy is that land is wealth.

      • May 6, 2013 at 6:49 pm

        “A Response by “Justaluckyfool” ” (as stated on ” 60 minutes” (12/11/11)” President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?

        YOUR COMMENT, Henry Law, “Wages are a SHARE of production. The other shares go to capital, rent of land and tax.”
        The cost of capital may perhaps be ‘the greatest cause of labor’s share to decrease.
        Read again:

        http://www.nakedcapitalism.com/2012/04/michael-hudson-productivity-the-miracle-of-compound-interest-and-poverty.html

        Sunday, April 22, 2012
        Michael Hudson: Productivity, The Miracle of Compound Interest, and Poverty
        By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

        “Justaluckyfool says, “THE SOLUTION: Lower FICA and federal personal income taxes to ZERO while at the same time raise even more revenue by a fair and equitable “taxation”.

        As Einstein said, “Keep it simple”
        **** Stop the CB from working for the Private For Profit Banks(PFPB) and have them become a Central Bank Working For The People (CBWFTP).The solution is a CBWFTP instead of PFPB”.Have the CBWFTP take away from the PFPB the taxation (interest) they collect for themselves as “profit” and give it back to its rightful owners: the people..
        A CBWFTP doing FOR us. what PFPB are doing TO us.
        ***WHY NOT do what your economist (those you believe to be correct in many matters) have said.”SEPARATE” banks from government; not nationalization; separation.
        Keynes, Minsky,Desoto, Soddy, hundreds of others: SEPARATION.
        Or as Mosler and Wray suggest “nationalization” (albeit that is more totalitarian than capitalistic).

        “A Simple Two Step Program”

        (1) Separate the government bank from the PFPB (private for profit banks)
        Mandate 100% capitalization for all financial transactions..
        (2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
        There would be no TBTF, or need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward. As an unintended consequence of this action the Fed would become a CBWFTP.. It would turn over to the US Treasury revenue for Congress to spend, just a little over $11.1 trillion a year with a mandate to spend: (SS, Medicare, Jobs,etc.,) so as to prevent deflation! This would put an end to F.I.C.A. taxes and federal income taxes as it would be more income than both of those taxes could ever be. As an unintended consequence, interest earned on our own money would surely be a fair taxation.
        How’s this for a win-win. Working toward equality while at the same time preventing deflation?
        Ben Bernanke could deserve the Noble in Economic Sciences.He has proven that QE can purchase massive amounts of assets without any increase in deficit spending. He has proven QE can produce a stream of revenue income. He needs only to do it FOR THE BENEFIT OF THE PEOPLE, rather than for the benefit of the private for profit banks(PFPB). Then Ben Bernanke would deserve the Noble in Economic Sciences.

        MAY GOD CONTINUE TO BLESS UNINTENDED CONSEQUENCES,SURELY THEY MUST REALLY BE MANKINDS INNOVATIONS.

        The government can not win against ‘compound interest’ on debt ,simply because the accumulation of interest over time is an infinite amount, one that never ends unless paid in full. Compound interest is the most powerful force in the universe and it is being used by the PFPB. We must take back that most powerful force in the universe and use it FOR THE BETTERMENT OF MANKIND.
        Please challenge, improve and share.

      • May 7, 2013 at 12:33 pm

        Michael Hudson supports the taxation of land. See http://www.youtube.com/watch?v=Elg6i3NxvdE,

  5. ezra abrams
    May 2, 2013 at 3:16 pm

    Uh, isn’t the population exploding ?
    I read the other day in the new york times, a story about Nigeria, and the huge pop explosion (the Times said, ymmv, that in some areas of Nigeria a woman is well respected till she has had at least 8 kids)

    didn’t the pop go down in the black death ?
    (were there enough deaths in WWII to affect demand for male labor in the US/western europe ? surely in eastern europe)

    also, if one pays attention, much of the immigration to the US from central america appears to be caused by endemic violence and police state/right wing violence; similar perhaps to europe, but he point is that this huge resovoiir of semi legal people drives down wages, no ?

  6. May 9, 2013 at 12:10 am

    OK, Henry Law, ” Wages are a SHARE of production. The other shares go to capital, rent of land and tax.”
    So the answer to the question, “What causes the share of labor to decrease?” is simple.
    “Capital, rent of land and tax” take a much greater share in this day and age than previously. Is it not a fact that: IF all capital in circulation since 1976 had an average of 4% Taxation (read: compound interest) it would have resulted in a 400% increase to the issuer of the “loans” “currency”. If $10 trillion issued that would be $40 trillion returned. Could that possibly explain: Why 100% of income growth has gone to 10%, while the other 90% had a decline since 1976.”

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