109 Presidential Address

Journal of the Statistical and Social Inquiry Society of Ireland Vol. XLII

Presidential Address An Inquiry into the Declining Labour Share of National Income and the Consequences for Economies and Societies Paul Sweeney1 President of the Statistical and Social Inquiry Society of Ireland (read before the Society, 1 May 2013) --------------------------------------------------------------------------------------Abstract: For over three decades, the share of national income going to labour in most countries has been in decline. Conversely, capital’s share of national income has increased. The trend in the decline in labour’s share of income has been less noticeable as national income has continued to rise. The reasons for the decline in labour share are complex and will be analysed. This decline has been secular, other than a small recent temporary reversal in some countries. This paper will examine (i) the trends in this decline in many countries, including Ireland; (ii) the definitional issues and trends within both the labour and capital share; (iii) its causes; and (iv) the implications for economic development and the consequences of this shift on economies and societies. The decline in labour’s share has contributed to increased inequality in the distribution of national income and there has also been a substantial redistribution within the labour share. The decline may have major consequences for economies, with declining demand and other impacts and also for societies, where social cohesion may be threatened by a continuation of the trend. Keywords: labour share, national income JEL Classifications: J01, J08 1.

INTRODUCTION

For over three decades, the share of national income going to labour in most developed countries has been in decline. This trend may have major consequences for economies, with reduced demand and also for societies, where social cohesion may be threatened by the trend. The reasons for the decline in labour share are complex. They include technology and increased returns to capital; globalisation; the reduction of labour’s bargaining power and the financialisation of the economy. The trend in the decline in labour’s share of income has been less noticeable as national income has continued to rise. Nonetheless, the decline in labour’s share has led to (i) a major shift in income distribution at the expense of labour; (ii) to increased polarisation in the distribution of personal income and (iii) a substantial redistribution within the labour share, with high earners gaining. The functional distribution of national income between wages, profits and rents was a major point of interest to classical economists, with David Ricardo stating it was “the principal problem of Political Economy.” 2 The decline in labour share was masked with the apparent rise on overall income, but after the Crash of 2008, the dissipation of the wealth effect of the asset boom and the fall in demand, interest in the area has risen. Lane (1998), Lawless and Whelan (2011), Flaherty and O’Riain (2013), Bassanini and Manfredi (2012), Stockhammer (2012), Glynn (2011), Young, (2010), Checchi and Penolosa (2005), Bentolila and Saint-Paul (2003), and international organisations, the OECD (2012), ILO (2007 & 2012), and IMF (2007) have examined the decline. Lane gave a Barrington Prize Lecture before the Society in 1998 on the decline in the labour share of national income and since then, as we will see, the decline has continued. 1

Thanks to Dr Chris Sibley of CSO, Bill Keating, Prof. Richard Mack. Dr Peter Rigney, Ronan O’Brien and Raffique Mottiar. The usual disclaimer applies. 2 Ricardo 1817, quoted in Glyn 2009.

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Labour’s share of national income is the remuneration of employees; their wages and salaries and employers’ social contributions and to this is added the income of the self- employed.3 Capital is domestic trading profits before tax, and rent, including imputed rent. A number of issues within these definitions will be addressed. Gordon and others have argued4 that in developed countries, economic growth of the levels seen for much of the past century may be over because its drivers, the large gains from public education, increased female participation, infrastructural investment etc., have largely been reaped. If this is so, and the cake is no longer growing at the pace we have been used to for more than a century, then its division will become more contested. The paper shows that since the early 1970s, in spite of rising productivity, average /median incomes in the US have risen only slightly. In most countries in all continents, the labour share of national income has been falling for many years. The complex issue of defining the labour share is examined and the reasons for the decline are analysed. Finally, the paper focuses on how policy should respond to the decline to end and reverse it. In many states in Europe since the War, the current generation will be the first not to see substantial improvement in living standards over those of their parents. The decline in the labour share is a key factor in this. This decline has been secular, other than a small recent temporary reversal in some countries. Only four developed countries have not seen a decline. This wide-ranging paper will examine the trends in this decline in the labour share, with a focus on Ireland; the definitional issues on capital/labour share; the reasons for the decline in labour’s share; the implications for on economies and societies; and, what should be done.

2.

TRENDS IN THE DECLINE IN LABOUR SHARE OF NATIONAL INCOME

2.1 Decline in Labour Share of National Income Internationally The decline in the labour share has occurred in most countries in the West since the mid 1970s. It has also been in decline in Asia and Africa in later years. The International Labour Organisation (ILO) points out that “a stable labour income share was accepted as a natural corollary or “stylized fact” of economic growth.” 5 The ILO found that the simple average of labour shares in 16 developed countries, including Ireland, for which data was available for this long period saw a fall from about 75 per cent of national income in the mid 1970s to 65 per cent to the years before the Crash. In a group of developing countries, it fell from around 62 per cent in the early 1990s to 58 per cent before the Crash. “Even in China where wages roughly tripled over the last decade, GDP increased at a faster rate than the total wage bill and hence the labour income share went down.” The crash reversed the trend, albeit only temporally, with a reversal to trend in 2009 in developed countries. This reflects “the countercyclical nature of the wage share which arises because wages tend to be less volatile than profits during economic downturns.” 6 The wage share has fallen “in three quarters of 69 countries from the early 1970s to late 2000s for which data is available“ and the drop in the wage share is more pronounced in emerging and developing economies.” 7 Since 1994, the wage share in Asia is down by 20 per centage points and the pace of decline accelerated in the past decade. In China, the wage share is down by 10 per cent since 2000, in spite of rising real wages. In Africa the wage share is down by 15 per centage points since 1990 with acceleration in later years and in North Africa by a spectacular 30 per centage points since 2000. Latin America has had the lowest fall. Since 1993 it was down only by 10 per centage points and it slowed in recent years (perhaps due to political change in many countries). The ILO confirms that in the advanced countries the wage share has been falling since 1975 but “the decline is more modest than in emerging and developing economies, falling roughly 9 per cent since 1980.” 8

3

For more on definitions see National Income & Expenditure, 2010, Appendix 1 or the OECD definition in its statistical database. Earnings include overtime, bonuses, directors’ fees, commissions, social contributions etc. 4 Robert J Gordon (2012) and the libertarian economist, Tyler Cowen, (2011). 5 ILO Global Wage Report 2012/13 p 42 citing this as Bowley’s Law after Arthur Bowley and also Paul Douglas with Charles Cobb – the Cobb Douglas production function. Keynes described this empirical constancy as “a bit of a miracle” and Solow questioned the evidence, correctly as the past three decades demonstrates. 6 ILO ibid p 42 7 ILO World of Work Report 2011, p 55. 8 ILO ibid and it adjusts its figures as the self employed having lower incomes.

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The OECD found that the rising capital share of national income has been associated with the rise in inequality internationally, “as the income of the average capital owner tends to be higher than the income of the average worker.”9 It also says “standard labour share statistics moreover, tend to underestimate the contraction of the share of national income that is received by the average worker. Recent work shows that the top income earners have seen their share of national income increase.” The OECD found that between 1990 and 2009, Ireland had the third largest decline in labour share. The largest was in Norway, followed by Finland and then Ireland. Four countries had an actual rise as can be seen from second graph below. The median share declined from 66.1% to 61.7% but in Ireland case the decline was from 65% to 56% in the period. These figures differ from the CSO as different methodologies are used, but the trend is the same. For example, the EU’s AMECO database uses GDP (gross including depreciation in the denominator) and this reduces the labour share. The labour share in Ireland in 2009 was around 55 per cent which was fifth from the bottom, with 25 countries with higher rates in Figure 1. Most countries had seen declines in the 19 year period. As the second OECD chart shows, the share in Ireland has fallen substantially below the average in these 30 odd countries in the period. Figure 1. The Decline of the Labour Share in OECD countries, 1990 - 2009 Level in 2009 (a)

Level in 1990 (b)

% 85 80 75 70 65 60 55 50

ISL

PRT

KOR

SVN

DNK

GBR

BEL

NLD

SWE

FIN

AUT

FRA

DEU

GRC

EST

ESP

ITA

ISR*

HUN

AUS

CAN

USA

JPN

CZE

IRL

POL

LUX

NZL

NOR

40

SVK

45

Change 1990-2009 Percentage points ***

*

*

DNK

5

GRC

10 ***

ISL

CZE

SVK

PRT

BEL

NZL

**

*

EST

***

NLD

SWE

***

***

USA

ISR*

***

***

FRA

ITA

***

**

HUN

SVN

***

***

AUS

***

***

GBR

***

ESP

***

CAN

***

DEU

***

KOR

***

***

AUT

***

POL

***

IRL

***

FIN

-15

***

NOR

-10

LUX

-5

JPN

0

Source: OECD, Chapter 3, Employment Outlook 2012 Notes: 3-year averages, starting and ending with indicated years. ***,**,* significant at the 1%, 5% and 10% level respectively. Statistical significance refers to the coefficient of the time trend in a bivariate regression on annual data with the labour share as dependent variable. The wage of the self-employed is imputed assuming that their annual wage is the same as for the average employee of the whole economy. The three year averages smooth the data and make it less comparable to say, Irish figures. 9

OECD, 2012, Employment Outlook, Ch 3 p114

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By historical and international standards the Irish labour share in the 1970s and 1980s appears exceptionally high. There are a number of probable explanations. First, profit levels were not high in Ireland in the 1970s and 1980s. Secondly, there may have been substantial under-reporting of rental and profit income under a relaxed Revenue administration.

% Nat Inc

Figure 2. Labour Shares in National Incomes Selected Countries 1970 - 2014 69

64

59

54

49

44

EU15

Austria

Denmark

Ireland

France

Source: OECD. Adjusted wage share: total economy: as per centage of GDP at current market prices (Compensation per employee as per centage of GDP at market prices per person employed.) As can be seen for Ireland (green) in Figure 2, the collapse is the most dramatic of the 4 countries (and EU15). Figure 3 shows the decline in 20 countries, mainly in Europe between 1970 and 2012 with Ireland and Greece with the largest falls.

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Figure 3. Change in Labour Share 1970 to 2012 in 20 Countries and EU15 75 70 65 60 55 50 45 40

1970

2012

Source: EU Ameco, 2012 Another international body, the IMF, showed that the decline in the labour share since 1980 has been much more pronounced in Europe and Japan (about 10 per centage points) than in the Anglo Saxon countries including the US (3-4 per centage points). It found that the strongest decline has been in Austria and Ireland. It makes the point that “despite the fall in labour share, real labour compensation has expanded robustly in all advanced countries since 1980,”10 but this reflects “both employment growth and increases in real compensation per worker, with a stronger weight on employment in the Anglo Saxon countries and on real compensation per worker in Europe.” In short, average income per worker in the Anglo Saxon countries did not rise, though since the mid 1990s in Europe, employment growth outpaced the growth in real compensation per worker. Most bodies cite the fact that incomes rose but ignore the fact that income is relative. People view their own income against that of others. 2.2 Decline in Labour Share of National Income in the US. The US led the world with the “American Dream” where citizens had expected to have a higher living standard than that of their parents, with the resultant growth in its middle class. 11 It was, however, one of the first nations to see that dream fade. With the growth in inequality, the hopes of a great proportion of Americans for improved living standards have diminished. While the stagnation of earnings in the US and the financial insecurity of its middle class are fairly well known, an examination is worthwhile, for the rest of the world may follow America. After the Second World War, the US economy boomed and family incomes grew uniformly across income distributions. However, between 1979 and 1995, those further up the income distribution scale saw their incomes grow fastest. In the late 1990s, incomes growth was uniform for the bottom four fifths but more rapid at the very top. Between 2000 and the Crash of 2008, income growth was weak in the US for all distributions (those at the top were hit by the stock market collapse of 2001).

10 11

IMF, 2007a, p 168. The term was coined by JT Adams.

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It can be seen from Table 1 that the growth in household incomes in the US for the middle fifth fell behind those in the top fifth in each period except 2000-2007, when middle fifth incomes fell very slightly less. Average real incomes of the middle fifth grew from $47,432 in 1979 to $50,865 in 2010 which was just 7.2 per cent. However, average incomes of the top fifth rose from $124,917 to $174,985 or 40.1 per cent. The average real income of the top 5 per cent rose from $190,513 to $296,763 – a rise of 55.8 per cent as the right hand column in Table 1 shows.

Table 1 Average household income, by income group, 1967-2010 (2011 dollars)

Income fifth Bottom

Second

Middle

Fourth

Top

Breakdown of top fifth 80th