Labour Losing to Capital

The just-released OECD Employment Outlook – full text not available on line – has an interesting chapter on the sharp decline of labour’s share of national income in virtually all OECD countries over the past 30 years, and especially the last twenty years.

The median labour share in the OECD fell from 66.1% in the early 1990s to 61.7% in the late 200s, and fell from 65.3% to 60.3% in the case of Canada, 1990 to 2009, marking a very significant shift of income from labour to capital. As the chapter notes in passing, this has serious macro-economic and equity implications.

The chapter makes the important point that the labour share has fallen even more significantly if one looks at the labour share excluding  the share of the top 1% which has risen sharply even as the total labour share has fallen. For Canada, they calculate that the labour share fell by 3.1 percentage points of national income between 1990 and 2000, but by 6.0 percentage points if one excludes the top 1%.

Another important point is that the decline of labour’s share is even greater when one looks only at the business sector. For Canada, the labour share of income generated in the business sector is found to have fallen from 67.4% to 60.3% between 1990 and 2007.  Basically, less and less of business pre tax revenue has gone to wages, and much more has gone to profits.

The falling labour share is found to be generally pervasive across industrial sectors, with very little of the overall shift explained by shifts between sectors.  This is true of Canada as well. Virtually all sectors have seen significant declines in the labour share.

A significant cause of the decline is seen to lie in the growth of total factor productivity and capital deepening. The basic argument is that higher value added will not be fully reflected in rising wages if capital can be readily substituted for labour. This has generally been the case in recent years, as new technologies have displaced middle and lower skilled workers.

While it does no quantify the impacts, the chapter also details at some length reasons to believe that the labour share has been undermined by a serious decline in the bargaining power of labour relative to capital. It is unusual for mainstream economic organizations like the OECD to think about income shares as a function of the relative power of capital and labour.

The chapter flags the depressing effect on worker bargaining power of increased international competition and also increased domestic competition arising from privatization and deregulation. This decline in bargaining power was mainly experienced by lower skilled workers, including workers displaced from middle skill level jobs.

A good deal of emphasis is also placed upon the decline of worker bargaining power as a result of declining levels of union coverage and also reduced bargaining leverage arising from highly decentralized bargaining.  The chapter states quite explicitly “the more developed collective bargaining is, the higher the bargaining power of workers is likely to be.”  It also makes the point that apparent stability in union density may mask a serious decline in bargaining power due to globalization, privatization and deregulation.