New York TIMES / Economix - Explaining the Science of Everyday Life
http://economix.blogs.nytimes.com/2013/06/25/labors-declining-share-is-an-international-problem/
[for graph & table]
June 25, 2013, 12:01 am
Labor’s Declining Share Is an International Problem
By BRUCE BARTLETT
Bruce Bartlett held senior policy roles in the Reagan and George H.W.
Bush administrations and served on the staffs of Representatives Jack
Kemp and Ron Paul. He is the author of “The Benefit and the Burden:
Tax Reform – Why We Need It and What It Will Take.”
In a recent post, I noted the declining share of national income going
to labor in the form of wages and benefits and the rising share going
to capital income like dividends. Before talking about solutions to
this problem, it’s important to understand that this is a worldwide
phenomenon not confined to the United States. This fact is documented
in recent studies.
For many years, economists said they believed that labor’s share of
income was an empirical relationship so stable that it was virtually a
constant. In fact, it was called “Bowley’s law,” after the British
economic historian Arthur Bowley, who first identified it almost 100
years ago.
It takes time for economists to separate trends from the normal ups
and downs in various types of economic data, and it took a while
before they realized that labor’s falling share went beyond what could
be explained by the recent recession. The latest Economic Report of
the President (see Pages 60-61) discusses this phenomenon and suggests
that it results from changes in technology, increasing globalization,
changes in market structure and the decline of labor unions.
More importantly, the report notes that labor’s falling share is even
more pronounced in other developed countries. The reason this is
important is that it allows us to avoid focusing too much on policies
and factors unique to the United States. For example, labor’s share of
income has fallen even in countries with much stronger protection for
labor unions and greater unionization of the labor force.
Studies by international economics agencies have begun looking at the
problem of labor’s declining share of income across national
boundaries.
Last year, the Organization for Economic Cooperation and Development
devoted a long chapter in its annual Employment Outlook to the
problem. It noted that labor’s share appears to have started falling
more than 30 years ago. Since the early 2000s, labor’s median share of
income across all its member countries has fallen to 61.7 percent from
66.1 percent.
To show the order of magnitude of that decline, if labor’s share of
income in the United States had fallen by the same percentage, workers
would be receiving more than $600 billion less aggregate income this
year alone. With about 144 million people working, that’s a loss of
more than $4,000 per worker.
And remember that labor’s share includes benefits, so it is not just
an issue of falling wages due to rising health insurance costs for
employers, as some economists assert.
Among the key points made in the O.E.C.D. report is that labor’s share
has not fallen equally across industries or classes of workers. The
share of income going to highly paid workers has increased in many
cases, while that going to low-paid workers has fallen. Thus income
inequality has increased.
The report identifies the substitution of capital for labor in many
industries as a cause of labor’s declining share. A shorthand term for
this is “automation,” but it really goes beyond simply replacing
workers with machines. It also includes the spread of technology, like
computers and the Internet, that has increased the productivity of
some workers, allowing them to do the work of several workers in the
recent past, but not others.
But as a recent report from the International Labor Organization
points out, the gains to higher productivity resulting from
technological innovation are not going entirely to workers. It says
that since 1999, average labor productivity in a cross-section of
countries has increased twice as much as wages.
A new study by Loukas Karabarbounis and Brent Neiman of the University
of Chicago’s Booth School of Business identifies the low cost of
capital as a key source of labor’s woes. Because of low interest rates
and low taxes on investment, companies have been encouraged to
substitute technology, machinery and equipment for labor, which
explains about half the decline in labor’s share of income, according
to their estimate.
Interestingly, this means that rising interest rates, which have
roiled the bond market in recent weeks, are part of the solution to
labor’s declining share of income. By raising the cost of capital,
higher rates will make labor relatively more attractive vis-à-vis
capital. Higher taxes on capital would also have that effect as well.
As Professor Neiman put it in an e-mail to me,
Rising real interest rates, higher prices of investment goods,
higher depreciation rates, or even increases in corporate tax rates
would (everything else equal) push labor’s share upward as they all
generate increases in the cost of capital.
This is important because many economists routinely assert that more
capital investment is critical to increase productivity, which, in
turn, will automatically lead to higher wages. While this is
undoubtedly true up to a point, we may have passed the point where it
is still true in economically advanced countries such as the United
States.
It may be that so much of the gains from productivity now go to
capital and to the most highly paid workers that one can no longer
say, as a truism, that more investment is per se a good thing for
workers.
Because there is so much concern right now about the economic
consequences of higher interest rates, which are almost universally
viewed as negative, I would like to note that higher rates will raise
the income of many middle-class people who tend to keep their savings
in bonds, certificates of deposit and savings accounts that yield very
little return.
As the table shows, interest income has fallen sharply since 2008,
when the economic crisis forced the Federal Reserve to lower interest
rates, taking hundreds of billions of dollars a year out of the
pockets of middle- and working-class families. By contrast, those with
high incomes tend to put more of their savings into stocks that have
benefited from a rising stock market, thus contributing further to
income inequality.
In short, from the point of view of workers and those with modest
savings, rising interest rates are unambiguously a good thing, because
they will raise personal income and labor’s share of national income.
Copyright 2013 The New York Times Company
--
Jim Devine / "Reality is that which, when you stop believing in it,
doesn't go away." -- Philip K. Dick
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