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THIRD WORLD ECONOMICS

Workers’ shrinking piece of global pie

Labour’s share of national income in many countries has declined, due in large part to policy decisions that weakened its bargaining power, new IMF research reveals.

by Peter Bakvis

An International Monetary Fund (IMF) paper warns policymakers about the risks of ignoring labour’s shrinking share of national incomes in many countries around the world.

“The decline in labour share has been concomitant with increases in income inequality,” the report notes, a trend which “can fuel social tension and … harm economic growth.”

The paper, “Understanding the Downward Trend in Labour Income Shares,” was subsequently published as a chapter in the IMF’s flagship World Economic Outlook report released on 18 April.

The report documents a decline in the share of national income going to labour (wages) versus capital (profits) in advanced economies starting in the 1980s and emerging and developing economies a decade later. While some countries have not followed the general trend, the IMF finds that for a sample of 89 economies for which it has sufficient data, those representing 78% of advanced-economy GDP and 70% of emerging-developing-economy GDP experienced declines in labour share between 1991 and 2014.

Among emerging and developing economies, the IMF report attributes most of the decline in labour share to “global integration,” notably participation in global value chains. For the advanced-economy group, the paper attributes one-half of the decline to the impact of technology, and a quarter to global integration, comprising financial integration and participation in global value chains.

Interlinked

The report also acknowledges that these factors are all strongly interlinked. Trade, financial integration and the application of new technologies have all been expedited by the removal of restrictions on trade and capital mobility.

The IMF paper explains the role of trade and financial integration, which intensified as a result of international agreements on trade and investment liberalization, by noting that “offshoring – or the threat thereof – lowers labour’s bargaining power.”

The report also notes the contribution of domestic policy decisions regarding product and labour market rules to the decline: “Changes in policies (such as declining corporate income tax rates) may have strengthened incentives to substitute capital for labour, while changes in institutional arrangements (such as unionization rates) may have contributed to the decline in labour’s share of income by lowering labour’s bargaining power.”

Additionally, it states that policy changes allowing for “increased [corporate] concentration across a number of industries” have contributed to increased profit and reduced labour shares in national income.

The section on policy implications is short and disappointing. It can be summarized as proposing “training, training and more training” to facilitate the reallocation of displaced workers, although it concedes that “longer-term redistributive measures might be required as well.”

Although the report notes that policy decisions, both domestic and international, have played an important role in weakening labour’s bargaining power relative to capital’s and contributing to the decline of labour’s income share, it proposes nothing to change those policy directions.                            

Peter Bakvis directs the Washington, DC office of the International Trade Union Confederation, which represents 180 million workers in 162 countries. This article is reproduced from Inequality.org under a Creative Commons licence.

Third World Economics, Issue No. 637, 16-31 March 2017, p14


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