IMF Survey: Is Labor Compensation Still Falling in Advanced Economies?

IMF News, May 24, 2012

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Title: IMF Survey: Is Labor Compensation Still Falling in Advanced Economies?
By Florence Jaumotte, IMF Research Department
Date: May 24, 2012
Summary statement: A new IMF study finds that the share of national income received by labor has evolved quite differently across advanced economies since the start of the Great Recession, with the greatest losses observed in the United States, Greece, and Spain.

"In many advanced countries, the labor share has been declining since the 1980s."
"Labor compensation is still higher today than just before the Great Recession."
"But the labor share has declined further in the United States, Greece, and Spain."
Changes in the labor share are defined as "the share of workers’ compensation in GDP" and are described as "a commonly used measure of inequality."
Caveat on interpretation: "the link between the labor share and inequality is not necessarily tight" because "workers may own shares directly or via their pension funds" so "some of the income that goes to capital flows back to them, diminishing the impact of falling labor shares on inequality."

The IMF study examines "the cyclical behavior of the labor share in advanced economies, especially during the Great Recession and the subsequent recovery."
Observed pattern: labor share data point to countercyclical behavior—"rising labor shares during the Great Recession and falling shares during the recovery."
Mechanism: "During the recession, profits were the component that contributed most often to the decline in income, which caused the labor share to increase."
Recovery dynamics: "During the recovery, although all components of GDP increased, profits rebounded quite strongly in most economies, leading to a decline in the labor share."

Advanced Europe: "the behavior of the labor share during the most recent recovery seems broadly similar to what took place during other recoveries between 1980 and 2006: profits increased quite strongly relative to labor income."
United States: "the recent recovery in the United States appears unusual from a historical perspective and more similar to an average European recovery, with a much stronger rebound in profits relative to labor income."
Possible explanation offered: "workers’ fear of long-term unemployment has led to more subdued wages relative to labor productivity growth during the recent recovery."
Research note: "But further research is required to determine the actual causes."

General finding: "In many European economies, workers are not worse off after the Great Recession in terms of their share of national income."
Net position: "The labor share is still higher today than just before the Great Recession in many economies."
Exceptions: "Yet, in the United States and in a few European economies (especially Greece and Spain), the labor share remains well below its precrisis level."
Uncertainty: "Only time will tell the extent to which the latest labor share losses in these countries will add to the general trend decline."