Should we be worried about the declining economic weight of income from labour?

Should we be worried about the declining economic weight of income from labour?

Both import penetration and the threat of offshoring reduce workers’ bargaining power and force them to accept lower pay in the hopes of keeping their jobs.

(AP/Paul Sancya)

As analysed in the article La caída del peso económico de las rentas del trabajo (The declining economic weight of income from labour) published by Fundación Alternativas, the fall in the share of labour income in national income since at least the 1980s is a global structural trend that has been widely documented by academia as well as the leading international economic bodies.

What this means is that average real wage growth has been systematically lower than productivity growth in most countries, and particularly in advanced economies, with these two variables experiencing a decoupling, in macroeconomic terms, over the long run.

The weak growth in real wages within the current context of the recovery in economic growth and employment in advanced economies, widely documented by the International Labour Organization (ILO) in its latest Global Wage Report, would indicate that, far from declining, the trend would appear to be progressing.

What are the consequences of slow labour income growth?

The declining labour share is a source of great concern, as the implications are far-reaching. Firstly, from a distributive perspective, the growth in income from capital at the expense of income from labour is driving increased inequality in the distribution of income generated by market transactions (primary distribution), given that capital, or wealth, is highly concentrated.

In addition, the shrinking of the wage bill limits the public sector’s ability to redistribute income (secondary distribution) given that, with the gradual fall over recent decades in taxes on income from capital, income from labour (and wage earners’ spending) is the fundamental tax base of taxation systems and, therefore, the financial backbone of welfare states.

Secondly, the declining economic weight of labour incomes also has macroeconomic implications, as they form the basis of consumption, which is the bedrock of domestic demand, the main driver of growth in market economies.

The fall in labour income, in fact, explains the growing importance of debt as the foundation for private spending, which has led to highly unstable growth patterns, given the lack of political control over financial markets, as sadly demonstrated by the latest financial crisis.

Finally, the sustained increase in income and wealth inequality, coupled with the spread of precarious forms of work to increasingly broader sections of society, is stirring social unrest, political disaffection, loss of faith in institutions and the rise of tribalism and identity politics. And the economic system’s failure to provide society as a whole with a decent life is casting doubt on the democratic value of the political system that protects it.

Where is the focus placed when explaining the trend?

Thus far, the consensus is quite broad. What is, however, sparking widespread debate are the reasons behind the fall in labour income, giving rise to very different positions regarding the kind of policies to be adopted to address the problem. There are, basically, two lines of reasoning: those focusing on technological developments and those highlighting the erosion of public intervention in the economy.

As regards technological change, the argument is that the widespread incorporation of digital technology and automation in production processes, along with the unprecedented progress in the innovation and invention of ever-cheaper capital goods, are leading to large numbers of middle-skilled workers being replaced by capital and swelling the ranks of a reserve army competing for lower-skilled jobs and thus placing downward pressure on pay and working conditions.

It is argued that only the highest skilled workers, and above all those from the science, technology, engineering and maths fields, will complement this technological change and see their pay increased.

According to this hypothesis, work’s loss of centrality in the economic system is inevitable, as digital technology and artificial intelligence take on greater magnitude in production processes, giving rise to the need, in addition to retraining policies, for alternative distribution mechanisms to labour market participation, such as a universal basic income financed by taxes on robots.

The second line of reasoning is centred on the more general trend towards the diminishing role of the public sector in the economy, seen since the 1980s, and the idea that greater public intervention in the economy could contribute to reversing the trend. It is argued that privatisation, especially in key sectors such as telecommunications, transport and energy, and the outsourcing and contracting of public services to private sector providers, is driving the fall in the wage share, based on the fact that the public sector does not seek to maximise profits and gives greater priority than the private sector to employment and working conditions.

In addition, the growing international liberalisation of goods, labour and capital markets (globalisation) has opened the door to imports from companies that are able to sell more cheaply because they produce in countries with lower labour costs, pushing domestic firms to adjust their prices to be able to compete, which is often achieved by reducing labour costs, be it through the automation of production processes or wage cuts.

The relocation of various stages in the production process to countries with lower wages is also said to be destroying jobs across the economy, and most particularly in the industrial sector. Both import penetration and the threat of production offshoring reduce workers’ bargaining power and force them to accept lower pay in the hopes of keeping their jobs.

Furthermore, the digitalisation of the economy within the context of global economic liberalisation and deregulation would appear to be intensifying the negative impact on income from labour, as companies are increasingly able to fragment production processes and relocate the various stages, and even specific tasks, making the most of the international price and pay gap. The rise in protectionist sentiment in advanced economies is rooted in these shifts.

The fall in the share of wages in value added is also linked to growing corporate concentration around the dominant company in many sectors, as the greater the lack of competition, the greater the companies’ ability to increase their profit margins and the lower the share of wages in value added, especially in the context of the decline in workers’ bargaining power, affecting their ability to impact how this monopolistic income is distributed.

Other factors include the growing financialisation of the economy, as a result of the wide-scale process of liberalising financial and exchange markets, initiated in the 1980s. The fact that the main shareholders of listed companies are institutional investors (investment funds, pension and insurance funds, hedge funds, etc.), seeking short-term profits, and that a large share of executive directors’ pay is linked to the company’s share price, is leading to a very sharp drop in the percentage of profits reinvested in productive activity (which would increase employment), and an increase in financial operations that tend to maximise short-term profits for shareholders, such as dividend pay-outs or share buybacks.

This focus on short-term profit maximisation is also behind the company restructuring operations aimed at only keeping the production process stages where the company has a clear competitive advantage.

The remaining stages are outsourced, subcontracted or offshored, which generally gives rise to job cuts, poorer working conditions, labour market segmentation and reduced bargaining power. These reverses culminate when the subcontracting takes place in low-wage regions and in the absence of labour rights.

The progressive decline in workers’ bargaining power is another reason behind the fall in wage incomes. The growing integration of advanced economies within deregulated international markets creates huge pressure to deregulate labour markets, to undermine the laws protecting workers, to weaken trade unions and deprive them of their central role in collective bargaining to set wages.

In this context, it is argued, the increase in structural unemployment, subcontracting and atypical employment (temporary, part-time and self-employed work), under the dictates, in many cases, of the flourishing new digital business models, is leading to the fragmentation of the working class, further hindering the collective defence of their interests and ultimately undermining their ability to secure wages in line with their productivity.

This article has been translated from Spanish.