The declining labour share of income: complacency vs concern

The September (2017) issue of Finance and Development provides new evidence to substantiate the well-known trend of the declining labour share of income ‘…around the world’. It notes that in 19 of 35 advanced economies, and 32 of 54 emerging economies, labour share declined between 1991 and 2014. It rightly notes that …’capital ownership is concentrated among the wealthiest households’. This means that ‘…an increase in the capital share of income tends to worsen income inequality.’

The author points out that about 50 per cent of the decline in labour’s share of income in advanced economies is due to technological change, while the key driver of rising inequality (in terms of changes in labour share) in emerging economies is globalisation (or global integration in the form of participation in global value chains). In the case of advanced economies, the author recommends multi-faceted policy interventions – investment in education, skill upgrades and various forms of active labour market policies – but none at all for emerging economies. Why?

The answer is remarkably complacent: ‘…the effects of global integration has been largely beneficial’ on emerging economies. Hence, no policy intervention is needed. But…the evidence suggests that globalisation has led to rising inequality by engendering ‘labour’s losses’ across a swathe of emerging economies. That, in and of itself, is a cost because it threatens social cohesion and future growth. One could argue that this calls for corrective policy action. The author is silent about the need to enhance the bargaining power of workers to cope with declining labour share and for strengthening social protection systems to reduce the vulnerability of those who are affected both by technological change and globalisation.

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