In most developed countries, labour’s share of national income has fallen since the mid 1980s. While the treatment of capital depreciation, income from housing, income of the self employed and intangible capital can explain some of the trend, the aggregate trends are very real. Empirical studies found the shift from labour to capital intensive industries, or the impact of trade exposures and outsourcing, as unlikely to explain these trends entirely; and that the impact of globalisation, labour-capital bargaining power, capital accumulation and uneven technology adoption to be interesting and important considerations. Their implications are summarised briefly as follows:
Globalisation: The digital revolution, China’s integration,
lower barriers to trade and capital flows, and declines in labour market
rigidities led to greater globalisation. Globalisation in the form of cheap
labour, increased import competition and outsourcing of labour shares can
explain some effects. Globalisation in theory should raise the elasticity of
labour demand relative to labour costs, and affect profit margins positively
too. So the net impact on labour’s national income share is not clear.
Bargaining power: Labour market deregulation and declining union
membership has increased in many developed countries, driven in part by ICT
adoption, decentralisation in collective bargaining and greater workforce
casualisation. While there is a relationship between union density, bargaining
power and factor income shares – it has not explained the persistence in
declining labour shares across geographies over time. Explanations should
reflect the relative bargaining power of labour and capital over the
distribution of productivity gains. Structural changes in labour and product
markets will affect this.
Capital accumulation: Technical change, capital accumulation and
the relative price of capital can have uneven impacts on factor income shares by
industry and worker types. If capital and labour are complementary factors,
growth in real wages should offset any declines in labour intensity. However, if
capital and labour are substitutes, such that their elasticity of substitution
is more than one, labour shares can fall with capital accumulation. Innovation
rates, capital augmenting technical change, decline in quality-equivalent
capital prices, and the spread of ICT can explain some of these effects.
Technology can influence bargaining positions of labour and capital – as
opposed to a purely mechanical process that determines outcomes and
distributions. However, while empirical studies find the elasticity of
substitution of capital for labour to be less than one (net complements),
automation and artificial intelligence may raise the elasticity in some
industries over time.
Uneven technology adoption: While global productivity growth has
slowed, the productivity growth of ‘frontier’ firms has remained strong and the
gap between frontier and laggard firms has increased over time. Frontier firms
are more capital and patent intensive, and enjoy greater sales and
profitability. These differentials may explain in part the aggregate slowdown
observed. Uneven technology take up might also explain labour income share
declines since frontier firms have no incentive to pay relatively higher real
wages (more bargaining power) to labour if laggards are not profitable enough to
do so either.
Empirical research found product concentration to increase in markets where technology brings more benefits to relatively more productive firms. Product concentration increases since the industry is increasingly dominated by firms on the frontier. Subsequently, industries with greater increases in concentration will experience larger declines in value added from labour. Results further suggest that the fall in labour income shares at the frontier is driven by new entrants with high capital intensity, as opposed to increases in capital intensity of existing frontier firms.
References
Weir, G. (2018). Wage Growth Puzzles and Technology. Research Discussion Paper. Reserve Bank of Australia. Available at <https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-10.pdf>