Workers left with less while rich take lion’s share

Workers’ share of national income has been in decline in most countries for more than three decades, but the decline has been concealed by growth.

This trend is already having major consequences for economies, with demand reduced. It is also affecting societies, as the incomes of the great majority rise slowly while those at the top have risen fast. This is undermining social cohesion and this long-term trend may profoundly alter politics.

The distribution of national income, between wages on one side and profits and rents on the other, was of significant interest to classical economists. But as national income rose, the decline in labour’s share was not noticed by many. But after five years of little growth and income stagnation, division of the cake is becoming a political issue. And with the continuing long downward trend, this will become a bigger issue than even this crisis.

In many states in Europe the current generation will be the first which will not enjoy a substantial improvement in living standards over those of their parents. This has already happened in the US, where, for most, the American Dream is dead as the productivity gains have been appropriated by those at the top. Productivity has risen, profits have soared to historically high levels, but workers' incomes are barely rising.

Ownership of capital
A growing proportion of income is being generated from capital and less from work. Only 26.7 per cent of the income of the top 1 per cent is from working. The rest comes from ownership of capital.

This rising inequality in the US has largely been driven by an increasing concentration of income at the top. Most Americans, the 60 per cent on middle incomes, saw their shares of after-tax income fall since 1979. The top 20 per cent did very well, but the top 5 per cent did even better. But it was the top 1 per cent who did extraordinarily well.

The rest of the world risks following the US as inequality grows, driven by the decline in labour’s share of income.

On all continents, labour’s share of national income has been falling. The share in developed countries has fallen from about 75 per cent in the mid 1970s to 60-65 per cent, with some, like the US, at 59 per cent. Labour’s share in Asia is down 20 per cent since 1994, including a fall in China.

For Ireland, the labour share is exceptionally low at 50 per cent in 2012 and is largely due to transfer-pricing by multinationals. This does not mean that exceptional profits are being made at the expense of Irish workers but rather that the profits reflect the transfer pricing from other countries to avail of our low corporation tax rate. Making an adjustment for transfer pricing would probably still leave the labour share in Ireland at the bottom of the range in which other developed countries lie.

The main reasons for the decline in labour share are technological change, globalisation, financialisation (the growth in the size and power of the financial sector), reduction in labour’s bargaining power (through deregulation, sectoral employment change, migration, offshoring and the decline in trade union power), and the rise in corporate power over that of sovereign states.

The rules of the market have been progressively altered to favour capital. Other than technological change, other reasons for the decline can be influenced by policy. Changes in market rules internationally have gone too far. The deregulation of markets, labour and finance has led to great imbalances, instability and low growth.

This great recession and lack of growth are manifestations of a concentration of greater wealth in fewer hands. The wealthy have a far lower propensity to spend than the rest of us, so demand is down.

Policy papers from governments, the International Monetary Fund, the OECD and International Labour Organisation show deep concern on this decline of labour's share.

However, little is being done to address the underlying causes. When the cake was getting bigger, the share was not so important. There has been little growth in many states for five years and there is little prospect of growth under current policies. If some economists are correct in their view that the era of strong economic growth may be over, then the issue of the declining labour share will become increasingly contested.

As President Michael D Higgins has said, a new economic model is urgently needed. Industrial relations institutions, taxation, education and skills and corporate governance need to be radically rebalanced towards citizens and away from corporations and an increasingly wealthy elite.

Paul Sweeney is former chief economist of the Irish Congress of Trade Unions. This article is based on his recent presidential address to the Statistical and
Social Inquiry Society sssi.ie/Presidential_Address_2013.pdf