Aurora Borealis
1 December 2013 CFA Institute Journal Review

Workers’ Share of National Income: Labor Pains (Digest Summary)

  1. Natalie Schoon

When the “labor share” of national income declines, productivity gains no longer automatically translate into broad increases in pay. So, the question is, Who reaps the benefits of productivity gains instead?

How Is This Article Useful to Practitioners?

The labor share of national income has steadily declined in the past couple of decades. Although the decline of labor share in developed countries is partly caused by cheap foreign labor, the effect on national income also applies to those countries. Contrary to previous economic ideas, the shares of income flowing to labor and capital are not fixed, and a falling labor share means that productivity gains no longer result in broad increases in pay. Instead, a larger share of productivity gains accrues to the owners of capital.

According to the Organisation for Economic Co-Operation and Development (OECD), roughly 80% of the decline in labor share is the result of cheaper and more powerful technology, which allows firms to swap labor for technology. Interestingly, in recent decades, it has been primarily mid-level skill jobs that have declined sharply, whereas employment in high- and low-skill occupations has increased.

Labor and market liberalization, as well as privatization, have had a further negative impact on wages. Although new protections for laborers could be considered, they could lead to more unemployment or a faster move to automation. Technological change and an increase in productivity may result in improved living standards, but if the resulting income gains do not reach wage and salary workers, the promise of improved living standards may not materialize.

Abstractor’s Viewpoint

The article makes an interesting point and clearly shows the shift from labor inputs to capital inputs. But it does not consider the impact of higher unemployment on the economy as a whole, which raises a number of questions beyond the monetary impact. Is there a move toward an even stronger divide in pay between high- and low-skilled workers? Is there a visible move toward re-educating mid-level skilled workers, or will they start taking over low-skilled jobs, causing an even larger underclass that cannot be employed? Whatever the answer, there are certainly wider economic implications.

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