For half a century, after World War II, the division of the spoils of economic growth between labour and capital remained stable. As economies grew, so the total income of labour and capital grew at almost exactly the same rate.
“It seemed as if some unwritten law of economics would ensure that labour and capital would benefit equally from material progress,” the International Labour Organisation (ILO) wrote in its Global Wage Report 2012/13.
That “law” no longer holds true. All over the world the share of the total income going to labour is showing a downward trend. Labour is getting less and capital more.
The Organisation for Economic Co-operation and Development (OECD) has found that between 1990 and 2009, the share of labour in national income declined in 26 out of 30 developed economies. It calculated that the median labour share across these countries fell from 66.1 percent to 61.7 percent over the period.
In respect of a different group of countries – the US, euro zone, Japan and the UK – economist Gavyn Davies summed it up succinctly in a blog posted on June 11: “The gross profit share has risen by about 10 percent of gross domestic product (GDP) over three decades, and the wage share has fallen by the same amount.”
The ILO World of Work Report 2011 found that the decline was even more pronounced in many emerging and developing countries, with considerable declines in Asia and north Africa and more stable but still declining shares in Latin America.
Even in China, where wages roughly tripled over the past decade, GDP increased at a faster rate than the total wage bill, so the labour income share went down.
The global financial crisis seemed to have reversed the trend only briefly, since which it has resumed.
A particular feature of the decline in labour’s share of income is that it is happening in spite of increased labour productivity. In the US, hourly labour productivity in the non-farm business sector has increased by about 85 percent since 1980, while real hourly compensation has risen by about 35 percent. (ILO Report, 2013.)
In Germany, labour productivity grew by 22.6 percent over the past two decades, while real monthly wages remained flat.
The ILO said that “based on the wage data for 36 countries, we estimate that since 1999 average labour productivity has increased more than twice as much as average wages in developed countries”.
Davies put it clearly: “Real wages in the US have grown much more slowly than output per head, which means that all of the gains from productivity growth have dropped into the hands of shareholders rather than workers.”
That is true all over, not just in the US.
BAD TIME TO BE A WORKER?
So the past 20 years or so have been a good time to be a shareholder, a bad time to be a worker. Well, not quite. It depends on which worker.
Studies in developed economies have found that wages of low- and medium-skilled workers are driving the decline. Both the International Institute for Labour Studies and the International Monetary Fund found that between 1980 and 2005 the labour share of unskilled workers fell, while it increased for skilled workers educated to tertiary level and above. Low-skilled worker have been stuffed; higher-skilled worker are doing better.
Even a rise in low-skilled jobs did not benefit low-skilled workers, because these jobs were taken by overqualified workers with intermediary levels of education. An example is a graduate serving as a checkout person – a trend we are beginning to see in South Africa as well, judging by some letters in The New Age newspaper.
The higher echelons of workers are even better insulated against the trend. If the compensation of the top 1 percent of earners was excluded, the drop of the labour share would be even greater.
The ILO report noted that “this reflects the sharp increase, especially in English-speaking countries, of the wage and salaries (including bonuses and exercised stock options) of top executives, who now cohabit with capital owners at the top of the income hierarchy”.
So although the top 1 percent are also nominally employees, they had their snouts in the trough of rising company profits and dividends. Not so much skills, as power – in this case the power to allocate (or get allocated) share options.
But not all employees get to the trough. Thus the pain of a relative decline in compensation as a proportion of GDP fell on those employees who did not share in profits or rents. These are the middle classes and lower-skilled people.
With one possible exception, these trends seem to hold for South Africa.
Going back all the way to 1946, the compensation of employees as a percentage of GDP ranged between 55 percent and 60 percent. This held for 53 years. Then in 2000 the trend started to change decisively. Compensation as a percentage of GDP declined to a record low of 49.4 percent in 2008.
INCREASE IN PRODUCTIVITY
This decline is all the more interesting because labour productivity increased substantially. For about 25 years – from 1970 to 1994 – labour productivity increased by less than 1 percent a year. Between 1995 and 2012 it increased by more than 3 percent a year. But this did not help the workers to stem the decline in their share of national income. It was exactly the same trend as was experienced globally.
Is there change coming? Maybe.
For the four years since 2008, employees’ compensation has increased somewhat to 51.8 percent of GDP. The quantity of the change is not big but the direction is. Labour’s share has increased for four years, bucking the global trend.
Is this change in direction a flash in the pan or is it something more permanent? We will see over the next few years. If the change is indeed permanent, it will certainly be an exception to global trends. (Or could it be a precursor?)
One must also ask if there is a link between the change in direction and the increase in strikes.
Data from Andrew Levy and Associates shows a marked increase since 2007, and labour’s share started rising in 2008. Pure coincidence? It seems to me power is not just at work in the remuneration committees in favour of share options, it is also at work on the shopfloor. If correct, this would explain the wave of strikes and militancy we are seeing in the mines.
Joseph Mathunjwa, the president of the Association of Mineworkers and Construction Union, condemned executives who “earn millions of dollars, and then lay off workers, claiming low platinum prices”. Cosatu president S’dumo Dlamini warmed to the same theme, claiming Lonmin’s financial officer was paid “152 times as much as a rock drill operator at the mine”.
These are tectonic shifts taking place. What will the consequences be?
First, let’s assume labour’s share does not keep on falling. For shareholders, the consequences could be painful. The ILO reports that much of the income transferred from labour to capital has been used to pay increased dividends.
Davies calculated that if the 10 percentage point decline in the wage share had not occurred, gross profit in those economies would have been about one-third lower and net profit (after depreciation) would have been about two-thirds lower.
He warned: “Equity markets would indeed be very vulnerable if the decline in the wage share started to reverse on a permanent basis.”
Second, let’s assume the decline continues unchanged. Well, there is a rise in public unrest and dissatisfaction in the world. Are people going out onto the streets because of some change in a GDP ratio?
No, 99.99 percent of people do not know about the ratio. But they have practical experience of the real-life stories that the ratio tells: huge perceived inequalities; inadequate public services; resentment towards those who get bailed out; anger towards those who live on public subsidies. And that is in the developed world.
In developing countries, “Unequal distribution and concentration of incomes … sparked a multitude of strikes and protests, especially when food and energy price increases have simultaneously eroded the purchasing power of wage earners at the bottom,” the ILO reported rather dispassionately.
Third, a decline in the purchasing power of large parts of the population affects economic growth. The rich may try to make up for it by spending more on cars and caviar but it is unlikely to make up for the declining purchasing power of the bulk.
The point was powerfully made in a reputed interaction between Henry Ford II and union boss Walter Reuther. Ford took Reuther to see his latest plant in Detroit, which contained the first primitive pre-robots, replacing workers in some jobs.
Ford asked Reuther: “Tell me Walter, how are you going to get them to join your union?” “I don’t know, Henry,” Reuther replied. “How are you going to get them to buy your cars?”
As Anton Rupert concluded after the Hiroshima bomb, “We are all scorpions in the same bottle, vulnerable to one another.” He was heavily criticised when he introduced a minimum wage of £1 a day in his factories in South Africa at a time when actual wages were much lower. But then he always did see the bigger picture.
JP Landman is a political analyst.