Something has been going on with the economy, that’s the global economy, and it explains so much – it explains the rise of Trump, the Brexit vote, and it highlights the single biggest problem in the economy today, but the question is, why?
The chart below says it all, it focusses on the US, where the data is more readily available. But the trend highlighted by the chart is global – labour’s share of GDP has been in steady decline since the beginning of this century, with a slight pick-up this decade. In fact you can go back further, a modest decline has been seen since the end of World War 2.
Actually, other data goes back even further, right back to 1929, and that shows that on the eve of the financial crisis of 2008, labour’s share of GDP was the lowest ever recorded.
We can only speculate about what it was like before 1929, but for what it is worth, the previous all-time low for labour’s share to GDP was set in 1929. This had led to speculation that there is a link between the falling share of GDP and economic crises. The two worst crises to have occurred in the US in the last 100 years or so, took place in the 1930s, and then in the period starting 2008. And on both occasions we apparently saw labour’s share of GDP hit some kind of nadir just beforehand.
The flip side to the equation is capital to GDP. When labour’s share falls, capital's share rises. In other words, ever since 2000 we have seen the triumph of capital over labour.
So that is good for business and bad for labour, right? Well not so fast. The corporate world needs sales, that’s the main diver of growth, and sales need workers to earn money. The triumph of capital is a pyrrhic victory, so named after the Greek general whose victories over the armies of Rome caused so many casualties that it was impossible for him to win the war with Rome. It is like that with the rise of capital to GDP, among the losers in the long term from such a trend, are the owners of capital themselves.
The fall in wages to GDP is linked to a chronic shortage of demand worldwide - which is why interest rates are so low. And it also explains social discontent which manifests itself in such phenomenons as the Brexit vote and the rise of Trump.
This all begs the question why.? The answer may seem obvious: globalisation. If that is the case, then explain this. Recent years has also seen the share of wages to GDP in emerging markets fall. And so it can’t be globalisation – you can see how offshoring can hit domestic labour markets, but it can’t explain why labour’s share of GDP is falling in countries that have been recipients of offshoring.
Four economists from the IMF, Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian have been looking at this very conundrum.
And their conclusion is that we have seen a twin effect: globalisation and automation, with the former of these two forces hitting emerging economies and the latter developed ones.
They say that for advanced economies; “both greater automation and more offshoring have skewed the composition of their production to become more capital-intensive, and a decline in the labour share of income has ensued."
But for emerging markets, they say that offshoring has thie effect of shifting production to tasks with higher capital shares.
They says that “empirically, we find that the globalisation of trade is the predominant factor in lowering the labour share of income in developing economies, while technological advancement is the key factor in advanced economies.”
There are other factors at play, too, for example technology has had this effect of creating a winner takes it all economy – with a handful of techs boasting massive revenue to a relatively modest sized labour force, creating a glut of labour available to work in the rest of the economy, which is less productive.
In the UK, austerity may have been another cause – when you squeeze the pay to public sector workers there can be a ripple effect, hitting wages in the private sector – after-all the private and public sectors are in competition with each other for the same pool of labour.
But here is a question – if workers in emerging markets have been losing out from globalisation, why is that in the West we keep hearing about how trade deals work against us? That does not compute.