Falling Wage Share Research Articles

Offshoring via vertical FDI in a long-run Kaleckian Model

This paper develops a two-country Kaleckian model in which “Northern” firms invest a fixed fraction of total investment in foreign affiliates in the low-wage “South” in order to offshore the production of intermediate goods over time. On the back of this setup follows an analysis of the macroeconomic implications of offshoring in the short and long run. Offshoring through vertical FDI is found to lead to a falling wage share and a simultaneously falling price level and rising markup in the North, whereas the effect on equilibrium capacity utilization may be positive or negative. Regardless of the effect on capacity utilization and firm profitability, we can show that the structural change implied by offshoring leads to lower rates of capital accumulation and employment in the North in the short run. The long-run effects on Northern employment and growth, on the other hand, depend crucially on the long-run accumulation rate of the Northern-owned multinational firms and on whether wages in the North and the South endogenously converge. The model appears well suited to shed light on many real-world macroeconomic phenomena, such as rising FDI flows, falling wage shares, rising markups in an era of low inflation, hysteresis, and secular stagnation.

Is growth in the South African economy profit-led or wage-led?

Orientation: This article assessed the impact of functional income distribution on economic growth, and how it can characterise the growth regime as profit-led or wage-led.Research purpose: This study investigated whether the problem of falling wage share as a percentage of gross domestic product (GDP) may have characterised growth as wage-led or profit-led between 1975 and 2019 in South Africa.Motivation for the study: Economic growth in South Africa has been low post the 2008 financial crisis and employees complain about insufficient wages.Research design/approach and method: This article used the Keynesian aggregate demand model and conducted an autoregressive distributed lag (ARDL) approach to assess the presence of a long-run relationship between changes in income distribution and aggregate demand.Main findings: The study found that the profit rate, rate of capacity utilisation and the real exchange rate have an influence on net exports. Profit rate and rate of capacity utilisation influenced aggregate consumption. Investment was affected by business confidence, profit rate, foreign demand and rate of capacity utilisation. Demand formation was exhilarationist and growth was profit-led. The foreign sector amplified the extent of profit-ledness.Practical/managerial implications: Government should create policies to reduce inequality in income shares. Institutions should consider reformulating labour dynamics to manage the extent to which the foreign sector amplified the economy to be profit-led.Contribution/value add: The South African economy is profit-led, inconsistent with developed country literature, which suggests that economies are generally wage-led. The findings highlight the importance of the foreign sector in determining the demand formation and growth regimes in the economy.

Household indebtedness, distribution, and bargaining power under distribution-induced technological change: a macroeconomic analysis

We present a stylized model to explore the interaction between household debt, functional income distribution, and technological change. We assume that weak labor bargaining power allows firms to set their mark-ups in order to meet a target profit rate. At a low wage share, workers’ households are assumed to have limited flexibility in meeting financial goals, so household indebtedness tends to rise as the wage share falls. Rising indebtedness further lowers labor's bargaining power, a phenomenon that was observed in the wave of financialization that began in the late twentieth century. Thus, rising debt levels allow firms even greater freedom to raise their target profit rate. We find that the dynamics can be either stable or unstable, with the potential for a self-reinforcing pattern of rising household indebtedness and falling wage share, consistent with trends in the US from the 1980s onward. The unstable cycle can be triggered by increased willingness by workers to incur debt and rising influence of household indebtedness on labor's bargaining strength and income distribution. The model can shed some light on widely observed trends over recent decades regarding household indebtedness, inequality, and technological changes in the US, and potentially in other OECD countries.

Internal devaluation and economic inequality in Portugal: challenges to industrial relations in times of crisis and recovery

Internal devaluation policies imposed in southern European countries since 2010 have weakened labour market institutions and intensified wage inequality and the falling wage share. The debate in the wake of the financial and economic crisis raised concerns about slow wage growth and persistent economic inequality. This article attempts to shed light on this debate, scrutinising the case of Portugal in the period 2010–2017. Mapping the broad developments at the national level, the article examines four sectors, looking in particular at the impact of minimum wages and collective bargaining on wage trends vis-à-vis wage inequality and wage share trajectories. We conclude that both minimum wage increases and the slight recovery of collective bargaining had a positive effect on wage outcomes and were important in reducing wage inequality. The extent of this reduction was limited, however, by uneven sectoral recovery dynamics and the persistent effects of precarious work, combined with critical liberalisation reforms.

Does Casualization Increase the Job Opportunity to the Workers or Impoverish Them? An Evidence from Indian-Organized Manufacturing Sector

This article investigates the impact of casualization on the labour market of organized manufacturing industries in India. In specific, this article analyses the impact of casualization on the labour demand and output elasticity of 15 manufacturing industries in the post-liberalization period for the direct production workers. Dynamic panel data analysis of system generalized methods of moment method is used here for the estimation of lagged labour demand for permanent production workers. Aggregate level analysis ensures that casualization has a significant positive impact on the labour demand and on output elasticity. Disaggregate level analysis also confirms the significant positive impact on the output elasticity at individual industry level. However, wage share of the workers falls along with the increase in the usage of contract workers across most of the industries. Output elasticity increases but at the cost of falling wage share. Casualization generates more job opportunity but reduces the wage share for the permanent production workers in post-liberalization period. JEL Codes: J20, J21, J30, J46, C23

Piketty’s Elasticity of Substitution: A Critique

ABSTRACTThis article examines Thomas Piketty’s explanation of a falling wage share. Piketty explains rising income inequality between labor and capital as a result of one parameter of a production function: an elasticity of substitution, σ, between labor and capital greater than one. This article reviews Piketty’s elasticity argument, which relies on a non-standard definition of capital. In light of the theory of land rent, it discusses why the non-standard capital definition is a measure of wealth, not capital and is problematic for estimating elasticities. It then presents simple long-run estimates of σ in constant elasticity of substitution functions for Piketty’s data as well as for a subset of his capital measure that comes closer to the standard definition of productive capital. The estimation results cast doubt on Piketty’s hypothesis that σ is greater than one.

Spadający udział płac w PKB w trzeciej RP a ekonomiczna sytuacja siły roboczej

During the Polish transformation, the wage share was systematically falling. In simplified terms, a falling wage share illustrates a worsening situation of the labour force with regard to living conditions and income inequality. The aim of the paper is to demonstrate that this is not necessarily the case, since a wage share results from various factors. What is more, in this respect Poland does not differ from other countries, both developed and transforming, where the wage share is also decreasing. On the other hand, Polish wages are dynamically increasing, in the recent years even faster than productivity, while the income inequality index is stable, or even declining. It can be, therefore, concluded that the falling wage share goes together with better conditions for the labour force.

Rate of Profit in Consumer Goods Sector in India: An Analysis in Marxian Framework

This paper wants to examine the empirical validity of the Marxian law of falling tendency of the rate of profit in the consumer goods sector in India at both aggregated and disaggregated levels during the period, 1967–2010. In this context, it attempts to find out whether there are any significant changes in the rate of profit variable in Indian consumer goods sector at both aggregated and disaggregated. The comparison between pre and post reform movements of the Marxian variables presents some interesting facts. During the pre reform years the rate of profit shows upward trend in almost all the consumer goods sectors and the consumer goods industry as a whole. But the same is not true during the post reform period. The study observes that in majority of the consumer goods industries rate of profit exhibits declining movement during the liberalization period. The other two Marxian variables like the rate of surplus value and organic composition of capital show significant rising trend during the same period. In fact, the relative strength of increasing organic composition outweighs the effect of rate of surplus value in these sectors. This illustrates the significance of Marxian law of falling tendency of the rate of profit in some of the prominent consumer goods sectors in India during the post reform years. In the sectors like food product the growth of technical composition over labour productivity and falling wage share signify the declining bargaining power of the Indian workers in the post reform years.

Inequality in China revisited. The effect of functional distribution of income on urban top incomes, the urban-rural gap and the Gini index, 1978–2015

Most analyses explain the increase in China's overall inequality during the reform period principally by means of the expansion of urban-rural income gap. This paper tries to state a relationship between functional distribution of income and China's Gini index. After presenting the main theoretical contributions that clarify the general relationship among those variables, we describe the mechanism that has connected them during the last decades in the Chinese economy. There exists a link between falling wage share, rising urban households' top incomes, urban-rural income gap and the Gini coefficient. These relationships are analysed for both the pre and post-crisis periods. After estimating the main relationships, the paper ends with a discussion on the ability of potential redistributive policies to reverse this pattern of inequality.

The (International) Political Economy of Falling Wage Shares: Situating Working-Class Agency

This paper relates the financial and monetary dimensions of the contemporary economic crisis to working-class agency via a central concern of classical political economy: the distribution of surplus between the chief factors of production. The fall in the wage share of value added is now accepted as a stylised fact in the empirical economic literature. This paper argues that the punctuated pattern of the development validates the regulation theoretical narrative of an epochal shift from Fordism to finance-led accumulation. Furthermore, synthesising econometric studies supports a class-centred explanation. In the last instance, the falling wage share is due to successful transnational class rule in the form of a neoliberal hegemonic paradigm. Crucially, such class rule restructured the environment of trade unions, rendering increasingly ineffective its relational power resources. The paper concludes by considering the contradictory implications for organised labour of the current financial crisis. On the one hand, the financial crisis offers an opportunity to link its particular interests to the general interest of macroeconomic management since low wage share inhibits growth rates. But how might trade unions assert a higher wage share in the face of the structural power of (financial) capital?

Can ‘New Welfare’ Address Poverty through More and Better Jobs?

AbstractNew welfare has been prominent in recent European social policy debates. It involves mobilising more people into paid work, improving human capital and ensuring fairer access to opportunities. This programme is attractive to business (more workers, better human capital and reduced social conflict to enhance productivity and profitability) and to citizens (more widely accessible job-opportunities with better rewards): a relatively low-cost approach to the difficulties governments face in maintaining support and meeting social goals as inequalities widen.The general move towards ‘new welfare’ gathered momentum during the past two decades, given extra impetus by the 2007–09 recession and subsequent stagnation. While employment rates rose during the prosperous years before the crisis, there was no commensurate reduction in poverty. Over the same period the share of economic growth returned to labour fell, labour markets were increasingly de-regulated and inequality increased. This raises the question of whether new welfare's economic goals (higher employment, improved human capital) and social goals (better job quality and incomes) may come into conflict.This paper examines data for seventeen European countries over the period 2001 to 2007. It shows that new welfare is much more successful at achieving higher employment than at reducing poverty, even during prosperity, and that the approach pays insufficient attention to structural factors, such as the falling wage share, and to institutional issues, such as labour market deregulation.

Corporate Balance Sheet Adjustment: Stylized Facts, Causes and Consequences

Abstract Using national account data, we define corporate balance sheet adjustment episodes as periods during which major increases in non-financial corporations’ net lending/ borrowing are experienced. An analysis of such episodes in Germany and Japan, and a more systematic exploration of a sample of 30 countries, show that corporate balance sheet adjustment tends to be long lasting and associated with significant effects on current accounts, wages and investment. Adjustment episodes lead to significant changes in corporate balance sheets ratios with a build-up of liquidity and a reduction of leverage. The adjustment is generally achieved by reducing investment and increasing savings on the back of a falling wage share. A panel econometric exercise shows that balance sheet adjustment periods are triggered by macroeconomic downturns as well as balance sheet stress due to high debt, low liquidity and negative equity price shocks.

Inequality and Recession in Britain and the USA

ABSTRACTFor two of the richest English‐speaking countries, Britain and the United States, growing income inequality has been a persistent feature of the past thirty years, leading some economists to question the cosy assumption that as economic development proceeds, intra‐country inequality must ultimately fall. Various hypotheses have been advanced to explain this phenomenon, the best known being that the technological revolution has driven a wedge between skilled and unskilled labour, but none is remotely convincing. Fundamentally, it is a question of political economy whether under conditions of stagnant real wages and a falling wage share, growth in deregulated, finance‐driven economies can last. The argument advanced here is that probably it cannot. The profit squeeze of the 1970s having given way to a neoliberal wage squeeze, growth came to depend on asset bubble driven consumption and investment. The Great Recession of 2008 raises questions not merely about neoliberal beliefs, but about whether future capitalist growth can occur unless investment is socialized.

Demand effects of the falling wage share in Austria

This paper aims at empirically estimating the demand effects of changes in functional income distribution for Austria. Based on a Post-Kaleckian macro model, this paper estimates the effects of a change in the wage share on the main demand aggregates. The results for the behavioral functions for consumption, investment, prices, exports and imports are compared with the specifications of the WIFO macro model and the IHS macro model. A reduction in the wage share has a restrictive effect on domestic demand as consumption decreases more strongly than investment increases. Because of the strong effects on net exports the overall effects of a decrease in the wage share are expansionary. However the latter effect operates only as far as the fall in the wage share increases competitiveness. As wage shares were also falling in Austria’s main trading partners, the effect seems to have been neutralized.

Technical Change and a Falling Wage Share if Profits are Maintained

In the framework of a multi‐sectoral and fixed‐coefficients Leontief model with capital stock matrix B, the paper addresses the issue of the impact of technical change on income distribution. Comparing two steady‐state positions, it is shown that with cost‐reducing, capital‐using and (uniformly) labour‐saving technical change the equilibrium rate of profit will fall, if it is the aggregate wage share which remains fixed, not the absolute level of the real wage. Conversely, the wage share falls if the profit rate does not change. The reactions are ambiguous if, instead of the coefficients of the matrix B, the coefficients of the input–output matrix A increase.