Understanding the Downward Trend in Labor Income Shares

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April 10, 2017/imf

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Introduction The labor share of income—the share of national income paid in wages, including benefits, to workers—has been on a downward trend in many countries (Figure 3.1). In advanced economies, labor income shares began trending down in the 1980s, reaching their lowest level of the past half century just prior to the global financial crisis of 2008–09, and have not recovered materially since. Data are more limited for emerging market and developing economies, but in more than half of them— and especially the larger economies in this group—labor shares have also declined since the early 1990s. At the same time, the extent of the declines has been diverse across countries, both within the advanced economy and emerging market economy groups.

A falling labor share implies that product wages grow more slowly than average labor productivity.1 If labor productivity increases at a rapid pace due to technological progress, and this is accompanied by steadily rising labor incomes, a declining labor share may be viewed as a byproduct of a favorable development. However, in a number of economies, declining labor shares result from the failure of product wage growth to keep up with weak productivity growth.

2 Furthermore, the decline in the labor share has been concomitant with increases in income inequality (Figure 3.2), for two reasons. The first is that within the workforce, lower-skilled workers have borne the brunt of the fall in labor share amid evidence of persistent declines in middle-skill occupations and income losses for middle-skilled workers in advanced economies (Autor and Dorn 2013; Goos, Manning, and Salomons 2014).

The second is that capital ownership is typically concentrated among the top of the income distribution (Wolff 2010) and hence an increase in the share of returns accruing to capital tends to raise income inequality (Box 3.1). Inequality can fuel social tension, and recent research suggests that it can also harm economic growth (Berg and Ostry 2011).

Low productivity growth, if persistent, leaves little room for expectations of future wage growth short of a reversal in favor of higher labor shares. As the global economy continues to struggle with subpar growth, an increasing recognition that the gains from growth often have not been broadly shared has strengthened a backlash against economic integration and bolstered support for inward-looking policies.

The forces behind the apparently widespread decline in labor income shares and the diversity of country experiences are not yet well understood. The fact that many advanced and emerging market and developing economies have experienced declines through somewhat synchronized evolutions—through domestic business cycles and over a period of profound structural transformation in advanced and emerging market economies alike—suggests key driving forces that are likely global. At the same time, varying exposures to common global trends may help explain the diversity in labor share trends across countries (Figure 3.3).