Labour’s share in national income continues to fall

• In the case of developed countries, the labour’s share to national incomes has dipped from 61.5% in 1980 to 54% in 2018.
• The labour’s share to national incomes has dipped from 52.5% in 1990 to 50% in 2018 in developing countries.
• More than 10% of GDP has been transferred from workers to capitalists in developed countries since the 1980s.
• The major factors responsible for the falling labour share in national income includes erosion of social security, decreasing unionization rates, the spread of outsourcing through global value chains, repression of wages and growing market concentration.

The constancy of labour’s share in national income is one of the long-accepted stylised facts in economics. But that is not valid anymore. For around four decades now, the share of national income accruing to labour has been declining in both developing and developed countries. Labour’s share in national income is the proportion of the national income paid to workers.

The latest United Nations Conference on Trade and Development (UNCTAD) report for September 2019 highlights that in developed countries, the labour’s share to national incomes has dipped from 61.5% in 1980 to 54% in 2018. In the case of developing countries, it reduced to around 50% in 2018 from 52.5% in 1990. This infers that the benefits of development are not shared similarly between workers and capitalists. Amid soaring wage inequalities, falling labour share is even more worrying as it suggests that the average share of workers in national income has reduced over time.

Analytically, the declining labour share in national income suggests that the worker’s real wage is growing slower than the worker’s average productivity. According to the Trade and Development Report 2019, more than 10% of GDP has been transferred from workers to capitalists in developed countries since the 1980s.

As reported by UNCTAD, the repression of wages has contributed to the downward trend in labour share as it has prevented labour wages from growing at the same pace as the cost of living and rise in productivity. The other factors responsible include erosion of social security, decreasing unionization rates, the spread of outsourcing through global value chains and growing market concentration.

Overall, globalisation with technological progress has increased the share of capital and reduced labour share in both developing and developed countries. However, weakened trade unions and a reduction in corporate taxes to attract foreign investment have an insignificant role in explaining the declining share of labour in national income.

The financial crises starting in the mid-1990s in countries like Turkey, Mexico and Argentina have further undermined labour shares both by paving the way for export-oriented policies and by depressing employment added the report.

The prospects of regulated and full-time employment have weakened with liberalization in the labour market in developing countries. This further led to a reduction in the bargaining power of workers, consequently increasing borrowing of money for household expenditure. All this finally slowed down demand and led to a recession-like situation according to the UNCTAD findings.

The report highlights that dipping labour share and other factors including weakening of productive investment, erosion of public spending and an increase in the stock of carbon dioxide are preventing countries from achieving Sustainable Development Goals (SDGs).

In India, too, the labour’s contribution to national income has been noted to fall since the 1980s. According to the ILO’s 2018 India Wage Report, wages are unable to keep up with labour productivity in India. The average labour productivity (GDP per worker) has increased faster than real average wages and labours’ share in national income has declined from 38.5% in 1981 to 35.4% in 2013. While the Indian formal industries labours contribution to national income has sharply declined to less than 10% in 2014 from 30% in 1980. RBI’s monetary policy report in April shows that staff costs per employee have come down in both manufacturing and services after reaching a high in 2015-16.

Moreover, the growth went down to single-digit from double digits for both rural and urban wages in the last three fiscals as per the SBI’s August 2019 study, Root Cause of the Current Demand Slowdown. This decline in wages has hit both private consumption and household savings badly, resulting in a slowdown in the overall economic growth of India. It is imperative to improve wages in order to restore demand in the Indian economy and boost its economic growth.

There are underlying structural challenges that stand in the way of revival of the global economy. There is a need to restore the labours’ share in national income with appropriate policies intending to raise minimum wages, providing governments’ support to trade unions, aligning real wages with productivity growth, re-regulating the financial system, strengthening the workers’ income security and making full employment and low unemployment the overall goal of economic policy.

In a globalised world, wages must also be discussed across borders. If several countries simultaneously raise their labours’ share then the positive effect on growth is greater for each country because of the synergies involved. If there is a co-ordinated rise in the labours share’, then there is more to win and less to lose for both developing and developed countries. However, most countries discover themselves stuck in the ‘prisoners´ dilemma’, where no country wants to take initiative out of fear of losing competitiveness and investment to others.