Labour's Shrinking Share of Pie Likely to Stir Anger Wages and Growth

Cape Times (South Africa), July 23, 2013 | Go to article overview

Labour's Shrinking Share of Pie Likely to Stir Anger Wages and Growth


BYLINE: JP Landman

For half a century, after World War II, the division of the spoils of economic growth between labour and capital remained stable. As economies grew, so the total income of labour and capital grew at almost exactly the same rate.

"It seemed as if some unwritten law of economics would ensure that labour and capital would benefit equally from material progress," the International Labour Organisation (ILO) wrote in its Global Wage Report 2012/13.

That "law" no longer holds true. All over the world the share of the total income going to labour is showing a downward trend. Labour is getting less and capital more.

The Organisation for Economic Co-operation and Development (OECD) has found that between 1990 and 2009, the share of labour in national income declined in 26 out of 30 developed economies. It calculated that the median labour share across these countries fell from 66.1 percent to 61.7 percent over the period.

In respect of a different group of countries - the US, euro zone, Japan and the UK - economist Gavyn Davies summed it up succinctly in a blog posted on June 11: "The gross profit share has risen by about 10 percent of gross domestic product (GDP) over three decades, and the wage share has fallen by the same amount."

The ILO World of Work Report 2011 found that the decline was even more pronounced in many emerging and developing countries, with considerable declines in Asia and north Africa and more stable but still declining shares in Latin America.

Even in China, where wages roughly tripled over the past decade, GDP increased at a faster rate than the total wage bill, so the labour income share went down.

The global financial crisis seemed to have reversed the trend only briefly, since which it has resumed.

A particular feature of the decline in labour's share of income is that it is happening in spite of increased labour productivity. In the US, hourly labour productivity in the non-farm business sector has increased by about 85 percent since 1980, while real hourly compensation has risen by about 35 percent. (ILO Report, 2013.)

In Germany, labour productivity grew by 22.6 percent over the past two decades, while real monthly wages remained flat.

The ILO said that "based on the wage data for 36 countries, we estimate that since 1999 average labour productivity has increased more than twice as much as average wages in developed countries".

Davies put it clearly: "Real wages in the US have grown much more slowly than output per head, which means that all of the gains from productivity growth have dropped into the hands of shareholders rather than workers."

That is true all over, not just in the US.

So the past 20 years or so have been a good time to be a shareholder, a bad time to be a worker. Well, not quite. It depends on which worker.

Studies in developed economies have found that wages of low- and medium-skilled workers are driving the decline. Both the International Institute for Labour Studies and the International Monetary Fund found that between 1980 and 2005 the labour share of unskilled workers fell, while it increased for skilled workers educated to tertiary level and above. Low-skilled worker have been stuffed; higher-skilled worker are doing better.

Even a rise in low-skilled jobs did not benefit low-skilled workers, because these jobs were taken by overqualified workers with intermediary levels of education. An example is a graduate serving as a checkout person - a trend we are beginning to see in South Africa as well, judging by some letters in The New Age newspaper.

The higher echelons of workers are even better insulated against the trend. If the compensation of the top 1 percent of earners was excluded, the drop of the labour share would be even greater.

The ILO report noted that "this reflects the sharp increase, especially in English-speaking countries, of the wage and salaries (including bonuses and exercised stock options) of top executives, who now cohabit with capital owners at the top of the income hierarchy".

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