Drivers of Declining Labor Share of Income

IMF Blog, April 12, 2017

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After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s.
Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.
Labor’s share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work, resulting in a growing fraction of productivity gains going to capital and likely raising income inequality.

Advanced economies:
- Labor income shares began trending down in the 1980s.
- They reached their lowest level of the past half century just prior to the global financial crisis of 2008, and have not recovered materially since.
- Labor income shares now are almost 4 percentage points lower than they were in 1970.
Emerging market and developing economies:
- Labor shares have declined since the early 1990s, especially in larger economies in this group.
- In China, labor shares fell by almost 3 percentage points despite impressive gains in poverty reduction over the past two decades.
Political economy:
- As growth remains subpar in many countries, recognition that gains from growth have not been broadly shared has strengthened a backlash against economic integration and bolstered support in favor of inward-looking policies in several advanced economies.

About half of the decline in labor shares in advanced economies can be traced to the impact of technology.
The decline was driven by a combination of:
- rapid progress in information and telecommunication technology, and
- a high share of occupations that could be easily be automated.
Global integration also contributed:
- Its contribution is estimated at about half that of technology.
- Participation in global value chains typically implies offshoring of labor-intensive tasks, lowering labor shares in tradable sectors.
Combined explanatory power:
- Technology and global integration explain close to 75 percent of the decline in labor shares in Germany and Italy.
- They explain close to 50 percent in the United States.
Attribution caveat:
- It is difficult to cleanly separate the impact of technology from global integration, or from policies and reforms, but results for advanced economies are characterized as compelling.

Global integration has allowed expanded access to capital and technology, raised productivity and growth, and lifted millions from poverty.
However, it may also be associated with declining labor income shares by shifting production toward more capital-intensive activities.
Findings:
- Global integration, and more specifically participation in global value chains, was the key driver of declines in labor shares in emerging markets.
- This effect can be interpreted as benign: it results from capital deepening that is not necessarily accompanied by dislocation of employment or reduction in wages.
- In Turkey, the decline in labor income share of around 5 percentage points is explained almost exclusively by the rapid rise in participation in global value chains.
Technology’s role:
- Technology has played a small role in these economies, reflecting a smaller decline in the relative price of investment goods and a lower share of automatable jobs.

Declines in labor shares in advanced economies have been particularly sharp for middle-skilled labor.
Routine-biased technology has displaced many tasks performed by middle-skilled workers, contributing to job polarization toward high-skilled and low-skilled occupations.
Global integration has reinforced this “hollowing-out” as firms in advanced economies gain access to a global labor supply through cross-border value chains.

Technological advancement and global economic integration have been key drivers of global prosperity, but their effects on labor shares challenge policymakers to find ways to spread benefits more broadly.
The design of specific policy responses will have to depend on country circumstances and be anchored in their social contracts.
Part 2 of the blog will discuss findings on skill and sectoral trends in labor income shares, possible policy responses, and a new cross-country index to measure the share of occupations at risk of being automated.

Source: Mai Chi Dao, Mitali Das, Zsoka Koczan, Weicheng Lian, "Drivers of Declining Labor Share of Income", April 12, 2017.

劳动力收入比重下降的驱动因素; IMF博客
- 劳动力收入比重下降的驱动因素; IMF博客 (Markdown version)
- 劳动力收入比重下降的驱动因素; IMF博客 (PDF)
雇用者所得比率の低下要因: マイ・チー・ダオ、ミタリ・ダス、ジョカ・コザン、ウェイチェン・リャン; IMFブログ 2017年4月10日掲載
- 雇用者所得比率の低下要因: マイ・チー・ダオ、ミタリ・ダス、ジョカ・コザン、ウェイチェン・リャン; IMFブログ 2017年4月10日掲載 (Markdown version)
- 雇用者所得比率の低下要因: マイ・チー・ダオ、ミタリ・ダス、ジョカ・コザン、ウェイチェン・リャン; IMFブログ 2017年4月10日掲載 (PDF)
041017ar
- 041017ar (Markdown version)
- 041017ar (PDF)