Bureau of Labor Statistics, Productivity and Costs; O.E.C.D., Annual Indicators“Other Developed Countries” refers to the member states of the Organization for Economic Cooperation and Development. The United States labor share includes imputed proprietor’s income. The O.E.C.D. labor share excludes the farm, mining, fuel and real estate sectors, and is aggregated by the Council of Economic Advisers on an annual basis for 22 countries using G.D.P. weights at current exchange rates.
On June 23, 2013, Bruce Bartlett writes in The New York Times:
In a recent post, I noted the declining share of national income going to labor in the form of wages and benefits and the rising share going to capital income like dividends. Before talking about solutions to this problem, it’s important to understand that this is a worldwide phenomenon not confined to the United States. This fact is documented in recent studies.
The latest Economic Report of the President (see Pages 60-61) discusses this phenomenon and suggests that it results from changes in technology, increasing globalization, changes in market structure and the decline of labor unions.
More importantly, the report notes that labor’s falling share is even more pronounced in other developed countries. The reason this is important is that it allows us to avoid focusing too much on policies and factors unique to the United States. For example, labor’s share of income has fallen even in countries with much stronger protection for labor unions and greater unionization of the labor force.
Among the key points made in the O.E.C.D. report is that labor’s share has not fallen equally across industries or classes of workers. The share of income going to highly paid workers has increased in many cases, while that going to low-paid workers has fallen. Thus income inequality has increased.
The report identifies the substitution of capital for labor in many industries as a cause of labor’s declining share. A shorthand term for this is “automation,” but it really goes beyond simply replacing workers with machines. It also includes the spread of technology, like computers and the Internet, that has increased the productivity of some workers, allowing them to do the work of several workers in the recent past, but not others.
But as a recent report from the International Labor Organization points out, the gains to higher productivity resulting from technological innovation are not going entirely to workers. It says that since 1999, average labor productivity in a cross-section of countries has increased twice as much as wages.
Because of low interest rates and low taxes on investment, companies have been encouraged to substitute technology, machinery and equipment for labor, which explains about half the decline in labor’s share of income, according to their estimate.
By raising the cost of capital, higher rates will make labor relatively more attractive vis-à-vis capital. Higher taxes on capital would also have that effect as well.
This is important because many economists routinely assert that more capital investment is critical to increase productivity, which, in turn, will automatically lead to higher wages. While this is undoubtedly true up to a point, we may have passed the point where it is still true in economically advanced countries such as the United States.It may be that so much of the gains from productivity now go to capital and to the most highly paid workers that one can no longer say, as a truism, that more investment is per se a good thing for workers.
In short, from the point of view of workers and those with modest savings, rising interest rates are unambiguously a good thing, because they will raise personal income and labor’s share of national income.
When labor unions transform to producers’ ownership unions, opportunity will be created for the unions to reach out to all shareholders (stock owners) who are not adequately represented on corporate boards, and eventually all labor workers will want to join an ownership union in order to be effectively represented as an aspiring capital owner. The overall strategy should assure that the labor compensation of the union’s members does not exceed the labor costs of the employer’s competitors, and that capital earnings of its members are built up to a level that optimizes their combined labor-capital worker earnings. A producers’ ownership union would work collaboratively with management to secure financing of advanced technologies and other new capital investments and broaden ownership. This will enable American companies to become more cost-competitive in global markets and to reduce the outsourcing of jobs to workers willing or forced to take lower wages.
