What drives the four decades-long decline in labour’s share of income?

Alexander Guschanski and Ozlem Onaran (2018) of the University of Greenwich Political Economy Research Centre provide evidence that changes in bargaining power, in particular the fall in union density and welfare state retrenchment, lie at the core of rising income inequality between labour and capital. The research challenges the established consensus that inequality is an unavoidable outcome of technological change or globalisation, and shows the importance of labour market institutions and social protection policies. The results of their recent project, funded by the Institute for New Economic Thinking, will be presented at the Royal Economics Society Annual Conference

Determinants of the wage share: a cross-country comparison using sectoral data

There has been a significant decline in the share of wages in GDP in both developed and developing countries since the 1980s. This paper analyses the determinants of the wage share (labour compensation as a ratio to value added) using sectoral data with country specific estimations for selected OECD countries. We compile a comprehensive sector-level dataset of eight OECD countries (Denmark, France, Germany, Italy, Spain, Sweden, the UK, the US) for the period of 1970 to 2011, which allows us to trace the developments in the wage share across high and low skilled sectors and within manufacturing and service industries. Our findings provide new insights with regard to the drivers of falling wage share. By conducting country specific estimations, we analyse how institutional differences in industrial relations, as well as social security and welfare regimes affect the wage share. Our findings lend strong support to the political economy approach to functional income distribution. Technological change had an impact, especially in Italy, the US and for the total country sample, but the effects are not robust with respect to the use of different specifications and the wage share in most countries in our sample appears to be driven by variables reflecting the bargaining power of labour such as union density, adjusted bargaining coverage and government spending. The relevance of these variables differs considerably across countries, lending support to our approach of country specific estimations. We find that globalisation had a strong impact on the wage share in all countries. The effect of globalisation on the wage share was least strong in Denmark. In Germany, and to a lesser extent in the UK, the effect is due to outward FDI and intermediate import penetration which reflects the impact of international outsourcing practices. Intermediate imports penetrations had no significant impact in Spain while FDI played a smaller role in France and the US. Different institutional variables appear to be relevant for each country. Germany exhibits the most robust positive effect of union density on the wage share. Conversely, collective bargaining coverage, together with social government spending, plays a more important role in France, the UK and the US. Financialisation had the most pronounced effect in the UK and the US, while it appears to be also relevant in Germany. We find mixed results for the effect of personal income inequality on the wage share. However, there is indicative confirmation for a negative effect in Germany, the UK and the US

Capital lessons: labour, inequality and how to respond

A sharp drop in the wage share in GDP in the UK since the 1980s has been accompanied by a jump in income share of the top 1 per cent. Rather than migration or technological change, increased capital mobility, decline in collective bargaining, labour market deregulation, austerity and rising household debt are to blame

Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test

This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: Many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades

The political economy of income distribution: industry level evidence from 14 OECD countries

This article presents an econometric estimation of the determinants of the wage share, using sectoral data for 14 OECD countries for the period 1970- 2014. We present estimations for the wage share of high- and low-skilled workers and within manufacturing and service industries. We augment sectoral data with input-output tables and union density data to obtain detailed estimations of the effect of technological change, globalisation and bargaining power on the wage share. We find a significant negative effect of globalisation and we discover offshoring to emerging markets to be a robust driver of this process. Technological change had an impact which differs by skill group, but theoretical issues and lack of robustness of the results cast doubt on the hypothesis of skill-biased technological change as a key factor in the overall decline in the wage share. Furthermore, we find a robust effect of institutional factors such as union density and minimum wages on the wage share, lending strong support to the political economy approach to functional income distribution

Rising inequality in the UK and the political economy of Brexit: lessons for policy

The EU Referendum in the UK on 23 June laid bare long existing divisions in the country. Throughout the campaign, the leave side diverted their discontent to a scapegoat of immigration and fuelled xenophobia. While there is consensus that the result is linked to inequality, the impact of migration on inequality is contested. Our recent research shows that inequality in the UK increased not because of migration, i.e. the mobility of labour, but because of the increased fallback options of capital related to increased capital mobility in the form of FDI and financialisation; declining fallback options of labour related to the decline in collective bargaining power, deregulation of the labour market, zero hours contracts and false self-employed contracts, austerity, housing crisis and rising household debt, which itself is linked to financialisation and inequality. The irony is that in fact, migration does not have a negative impact on the share of wages in total income and real wages even in the service sectors predominantly hiring low-skilled labour, which also employ a large share of migrants. The quick conclusions related to the impact of immigration on inequality, without adequately decomposing the impact of all other factors, misses the point that correlation is not causation. The real solution to inequality requires regulating finance and the corporate governance of corporations, taming capital mobility, increasing public investment in social infrastructure and housing, regulating the labour market and improving the legislation to increase the voice of trade unions and collective bargaining coverage. In an alternative economy where the balance of power shifts in favour of labour and unions have a strong voice, if migrants come to work, it is possible to set the terms and conditions under which they work by the local workforce. Conversely, in the current situation where the bargaining power of workers has been dramatically eroded with respect to capital, high capital mobility and low wages elsewhere in Eastern Europe and the world will mean the firms will relocate or offshore parts of their production abroad, even if migration can be limited after Brexit

Determinants of the wage share: A cross-country comparison using sectoral data

Previous literature has put forward two main hypotheses to explain the decline in the share of wages in GDP: The technological change hypothesis suggests that increasing substitution of capital for labour drives the decline in the labour share. The bargaining power hypothesis sees a decline in the bargaining power of labour as the main explanatory factor. This paper tests these two hypotheses by means of country specific estimations using industry level data for six OECD countries (France, Germany, Italy, Spain, the U.K., the U.S.). We compile a comprehensive sector-level dataset for the 1970-2011 period, which allows us to trace changes in the wage share across high and low skilled sectors and within manufacturing and service industries. Our findings lend support to the bargaining power hypothesis. Technological change had an impact, especially in Italy, Spain and the U.S., but the effects are not robust across different specifications. The relevance of variables reflecting the bargaining power of labour differs considerably across countries, lending support to our approach of country specific estimations. We find that union density is the most relevant measure of the bargaining power of labour in highly coordinated bargaining regimes (Germany, Italy, Spain), while collective bargaining coverage and social government spending is more important in countries where firm-level bargaining dominates (France, the U.K, the U.S.). Financialisation reduced the bargaining power of labour mainly in the U.K., the U.S and Germany. Different measures of globalisation had an impact on the wage share in all countries

Why is the wage share falling in emerging economies? Industry level evidence

This article presents an econometric analysis of the wage share in seven emerging economies. We focus on the effect of globalisation, captured by participation in global value chains and financial integration, indicators of bargaining power of labour and technological change on the wage share. We use input-output tables that allow us to obtain detailed measures of global value chain participation, and sectoral data to distinguish the effect on high- and low-skilled workers and within manufacturing and service industries. We find a negative effect of offshoring from advanced to emerging economies, as well as negative effects of financial integration. Our findings suggest that the transmission mechanism is a reduction in labours’ bargaining power vis-à-vis capital. We find a robust positive effect of union density on the wage share but no evidence of a negative effect of technological change

The causes of falling wage share: sectoral and firm level evidence from developed and developing countries – what have we learned?

The last four decades have been characterised by drastic changes in the distribution of income between wages and profits in both OECD countries and emerging economies. We have recently analysed the causes of the decline in the wage share in the developed and developing countries for a project titled ‘The causes of falling wage share and prospects for growth with equality in a globalized economy’ for the Institute of New Economic Thinking, and this paper summarizes our findings. We provide evidence that changes in bargaining power, in particular the fall in union density and welfare state retrenchment, as well as financialization and offshoring lie at the core of rising income inequality between labour and capital in both developed and developing economies. We challenge the established consensus that inequality is an unavoidable outcome of technological change or globalisation, and show the importance of labour market institutions and social protection policies

The labour share and financialisation: Evidence from publicly listed firms

This paper provides international evidence for the effect of financialisation on the labour share at the firm level. We test different hypotheses about the impact of financialisation on functional income distribution, while also controlling for the effect of technological change, market concentration, labour market institutions and globalisation. We use panel data for publicly listed non-financial companies globally and with a particular focus on the EU15 for the period of 1995-2016. We find a negative effect of financialisation on the labour share due to increased shareholder value orientation in all countries, while there is also evidence of a negative effect due to an increase in mark-ups in France and the UK. Additionally, our findings cast doubt on the hypotheses that the decline in the labour share in European publicly listed firms is due to technological change. Similarly, market concentration did not play an important role for the decline in the labour share. In contrast, we find that concentration has declined among publicly listed firms in Europe, and that concentration is not associated with declining labour shares