Labour is getting a smaller and smaller slice of national income

This topic is of profound importance. It gets the heart of a fundamental economic issue: the distribution of income. When national income rises, does that extra income go into the pockets of workers or capitalists?The answer is clear cut: labour is getting a smaller slice of the pie. How and why might that be happening, and what might be done? Here are links and summary of a couple of articles, plus a great Economist video clip.

A generation ago the benefits of rising income were shared in a way that seemed stable and predictable. Workers would gain about two thirds of any increase in income, with the owners of capital getting the other third. Yet that stable relationship is changing. And it’s not just in Britain. The trend is gradually unraveling through time across a range of countries. This fact is reported in the Economist, and I recommend you follow this link to get to the article and a terrific accompanying video clip.

The “labour share” of national income has been falling across much of the world since the 1980s. The OECD reckons that labour captured just 62% of all income in the 2000s, down from over 66% in the early 1990s. So an ever larger share of the benefits of growth accrues to owners of capital. That sort of decline is not supposed to happen. In fact, for decades economists treated the shares of income flowing to labour and capital as fixed.

Why is this happening? In the rich world, there is strong evidence that the trend is driven by wage competition from the poor world. Yet trade cannot account for the entire problem because workers in many developing countries, from China to Mexico, have also struggled to seize the benefits of growth over the past two decades. The likeliest culprit is technology, which, the OECD estimates, accounts for roughly 80% of the drop in the labour share among its members. Cheaper and more powerful equipment, in robotics and computing, has allowed firms to automate an ever larger array of tasks. One study estimates that the cost of investment goods, relative to consumption goods, has dropped 25% over the past 35 years. That made it attractive for firms to substitute labour for software whenever possible, which has contributed to a decline in the labour share of five percentage points. In places and industries where the cost of investment goods fell by more, the drop in the labour share was correspondingly larger.

Political and legal changes are also responsible. In the late 1970s European workers enjoyed high labour shares thanks to stiff labour-market regulation. The labour share topped 75% in Spain and 80% in France. When labour- and product-market liberalisation swept Europe in the early 1980s—motivated in part by stubbornly high unemployment—labour shares tumbled. Privatisation has further weakened labour’s hold.

What is to be done?

Technology can’t be reversed and regulation and protectionism may offer a ‘cure’ that’s worse than the disease. It’s a significant challenge – check out the article and video for some suggestions.