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posted on 23 April 2017

Understanding The Downward Trend In Labor Income Shares

from the International Monetary Fund

This chapter documents the downward trend in the labor share of income since the early 1990s, as well as its heterogeneous evolution across countries, industries, and workers of different skill groups, using newly assembled data for a large sample of advanced and emerging market and developing economies. The chapter then analyzes the forces behind these trends.

Technological progress, reflected in the steep decline in the relative price of investment goods, along with varying exposure to routine-based occupations, explains about half the overall decline in advanced economies, with a larger negative impact on the earnings of middle-skilled workers. In emerging markets, the labor share evolution is explained predominantly by the forces of global integration, particularly the expansion of global value chains that contribThis chapter documents the downward trend in the labor share of income since the early 1990s, as well as its heterogeneous evolution across countries, industries, and workers of different skill groups, using newly assembled data for a large sample of advanced and emerging market and developing economies. The chapter then analyzes the forces behind these trends. Technological progress, reflected in the steep decline in the relative price of investment goods, along with varying exposure to routine-based occupations, explains about half the overall decline in advanced economies, with a larger negative impact on the earnings of middle-skilled workers. In emerging markets, the labor share evolution is explained predominantly by the forces of global integration, particularly the expansion of global value chains that contrib

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 The authors of this chapter are Mai Chi Dao, Mitali Das (team leader), Zsoka Koczan, Weicheng Lian, with contributions from Jihad Dagher and support from Benjamin Hilgenstock and Hao Jiang. Robert Feenstra and Brent Neiman were external consultants. 1The labor share of income can be written as: (wL)/(PY) = (w/P) / (Y/L), in which w is the money wage (including benefits) per worker, L is employment (hours worked), Y is real output, Y/L is therefore labor productivity, and P is the GDP deflator. Because w/P is the wage expressed in units of domestic output, it is also called the (real) product wage. The product wage may differ from the consumption wage (that is, wages measured in terms of consumption), as the latter takes into account the terms of trade (the price of imports in terms 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 income accruing to capital tends to raise income inequality.

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Source: http://www.imf.org/~/media/Files/Publications/WEO/2017/April/pdf/c3.ashx

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