How do capital and labor split economic gains in an age of globalization?

Abstract

Recent debates about the 1% vs. 99%, CEO compensation, minimum wage, and income inequality suggest an increasingly unfavorable division of economic gains for labor. Indeed, how capital and labor divide the gains from production is central to the study of political economy, particularly the impact of globalization and unionization. Yet, the prominent measures featured in the research to date, most notably labor compensation over GDP, are inadequate for studying the split of gains between labor and capital. We argue that the division of gains between labor and capital is more accurately and precisely conceptualized and measured by the ratio of labor compensation over operating corporate profits in the private sector. Using newly collected private-sector data from 17 industrial democracies over 30 years from 1981 to 2012, our analysis uncovers important patterns. First, labor compensation and corporate profits both rose in absolute terms over the last three decades, but the compensation-profit ratio experienced a sharp decline, meaning that the improvement was smaller for labor than capital. Second, rising economic openness and declining union density contributed to the fall of the compensation-profit ratio. Finally, there was a clear cross-national convergence toward declining compensation-profit ratio, rising openness, and shrinking labor unions. We conjecture that these results point to the movement of advanced industrial democracies toward a new capitalism equilibrium.