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Workers’ Shrinking Piece of Global Pie

New research points to globalization as a key driver of labor’s declining share of national income, particularly in developing countries.

A just-released International Monetary Fund paper warns policymakers about the risks of ignoring labor’s shrinking share of national incomes in many countries around the world.

“The decline in labor share has been concomitant with increases in income inequality,” the report notes, a trend which “can fuel social tension and … harm economic growth.”

The paper, “Understanding the Downward Trend in Labor Income Shares,” will be a chapter in the IMF’s flagship World Economic Outlook report, to be released April 18.

The report documents a decline in the share of national income going to labor (wages) versus capital (profits) in advanced economies starting in the 1980s and emerging and developing economies a decade later. While some countries have not followed the general trend, the IMF finds that for a sample of 89 economies for which it has sufficient data, those representing 78 percent of advanced economy GDP and 70 percent of emerging-developing economy GDP experienced declines in labor share between 1991 and 2014.

Countries representing 78% of advanced economy GDP had declines in labor share of income between 1991 and 2014.

Among developing-emerging economy countries, the IMF report attributes most of the decline in labor share to “global integration,” notably participation in global value chains. For the advanced-economy group, the paper attributes one-half of the decline to the impact of technology, and a quarter to global integration, comprising financial integration and participation in global value chains.

The report also acknowledges that these factors are all strongly interlinked. Trade, financial integration, and the application of new technologies have all been expedited by the removal of restrictions on trade and capital mobility.

The IMF paper explains the role of trade and financial integration, which intensified as a result of international agreements on trade and investment liberalization, by noting that “offshoring — or the threat thereof — lowers labor’s bargaining power.”

The report also notes the contribution of domestic policy decisions regarding product and labor market rules to the decline: “Changes in policies (such as declining corporate income tax rates) may have strengthened incentives to substitute capital for labor, while changes in institutional arrangements (such as unionization rates) may have contributed to the decline in labor’s share of income by lowering labor’s bargaining power.”

The report’s policy recommendations can be summarized as ‘training, training, and more training.’

Additionally, it states that policy changes allowing for “increased [corporate] concentration across a number of industries” have contributed to increased profit and reduced labor shares in national income.

The section on policy implications is short and disappointing. It can be summarized as proposing ”training, training, and more training” to facilitate the reallocation of displaced workers, although it concedes that “longer-term redistributive measures might be required as well.”

Although the report notes that policy decisions, both domestic and international, have played an important role in weakening labor’s bargaining power relative to capital’s and contributing to the decline of labor’s income share, it proposes nothing to change those policy directions.

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