Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

An Inquiry into the Declining Labour Share of National Income and the Consequences for Economies and Societies

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

An Inquiry into the Declining Labour Share of National Income and the Consequences for Economies and Societies

Article excerpt

1. INTRODUCTION

For over three decades, the share of national income going to labour in most developed countries has been in decline. This trend may have major consequences for economies, with reduced demand and also for societies, where social cohesion may be threatened by the trend.

The reasons for the decline in labour share are complex. They include technology and increased returns to capital; globalisation; the reduction of labour's bargaining power and the financialisation of the economy. The trend in the decline in labour's share of income has been less noticeable as national income has continued to rise. Nonetheless, the decline in labour's share has led to (i) a major shift in income distribution at the expense of labour; (ii) to increased polarisation in the distribution of personal income and (iii) a substantial redistribution within the labour share, with high earners gaining.

The functional distribution of national income between wages, profits and rents was a major point of interest to classical economists, with David Ricardo stating it was "the principal problem of Political Economy." (2) The decline in labour share was masked with the apparent rise on overall income, but after the Crash of 2008, the dissipation of the wealth effect of the asset boom and the fall in demand, interest in the area has risen. Lane (1998), Lawless and Whelan (2011), Flaherty and O'Riain (2013), Bassanini and Manfredi (2012), Stockhammer (2012), Glynn (2011), Young, (2010), Checchi and Penolosa (2005), Bentolila and Saint-Paul (2003), and international organisations, the OECD (2012), ILO (2007 & 2012), and IMF (2007) have examined the decline. Lane gave a Barrington Prize Lecture before the Society in 1998 on the decline in the labour share of national income and since then, as we will see, the decline has continued.

Labour's share of national income is the remuneration of employees; their wages and salaries and employers' social contributions and to this is added the income of the self- employed. (3) Capital is domestic trading profits before tax, and rent, including imputed rent. A number of issues within these definitions will be addressed.

Gordon and others have argued (4) that in developed countries, economic growth of the levels seen for much of the past century may be over because its drivers, the large gains from public education, increased female participation, infrastructural investment etc., have largely been reaped. If this is so, and the cake is no longer growing at the pace we have been used to for more than a century, then its division will become more contested. The paper shows that since the early 1970s, in spite of rising productivity, average /median incomes in the US have risen only slightly. In most countries in all continents, the labour share of national income has been falling for many years. The complex issue of defining the labour share is examined and the reasons for the decline are analysed. Finally, the paper focuses on how policy should respond to the decline to end and reverse it.

In many states in Europe since the War, the current generation will be the first not to see substantial improvement in living standards over those of their parents. The decline in the labour share is a key factor in this.

This decline has been secular, other than a small recent temporary reversal in some countries. Only four developed countries have not seen a decline. This wide-ranging paper will examine the trends in this decline in the labour share, with a focus on Ireland; the definitional issues on capital/labour share; the reasons for the decline in labour's share; the implications for on economies and societies; and, what should be done.

2. TRENDS IN THE DECLINE IN LABOUR SHARE OF NATIONAL INCOME

2.1 Decline in Labour Share of National Income Internationally

The decline in the labour share has occurred in most countries in the West since the mid 1970s. …

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