National income has increasingly gone to profits instead of wages, leading to slower GDP growth

Total national income can be divided into two halves: the wage share and the profit share. As sociologist Tali Kristal showed in a 2010 article in American Sociological Review, the wage share of national income has declined since the 1980s in the Anglo-Saxon countries, Continental Europe, and even Scandinavia. On average across 16 OECD countries, “labor’s share declined by almost 9 percentage points since the early 1980s, from 73 percent in 1980 to 64 percent in 2005.”

Sophisticated statistical research by heterodox macroeconomists – those who work outside of the mainstream based on theories developed by Marx, Keynes and Polish macroeconomist Michael Kalecki – has found that declining wage shares lead to lower GDP growth. In other words, if more national income was shifted from profits to wages, GDP growth would improve.

Where such a relationship holds true, growth is said to be “wage-led” – reducing the wage share generates slower growth; increasing the wage share would improve growth. If a reduction in the wage share did not result in reduced growth, then growth is “profit led,” meaning that investment demand offsets any decline associated with the reduced wage share.

A new report for the International Labor Organization has now shown that the G20 countries – which account for 80% of Gross World Product – as a whole are wage-led. In short, planet earth is wage-led.

In this post I briefly elaborate how these findings relate to the sociology of work before turning to explain the Kaleckian macro models in a bit more detail.

As I have shown in a recent article, a declining wage share and slow growth in the US are driven by wage stagnation, employment externalization and job polarization. Over the 39 year period from 1969–2008, wage and salary income for high school educated males aged 25–44 and college educated males aged 25–34 declined in real terms. At the time, in response to intensified international competition, employers have increasingly externalized work through global and domestic outsourcing, deunionization, and a shift from administratively-determined wages associated with specific positions within companies to the market-determination of wages (pay for performance, etc).

As a result of these trends, including sectoral shifts toward a service-based economy resulting from the offshoring of manufacturing, job growth since the 1980s has been entirely concentrated in the lowest wage and highest wage jobs, with no growth in mid-level jobs.

The outcome of internationalization and externalization in employment relations is that institutions supporting upward mobility and middle-class incomes in the economy have been eroded. Good manufacturing jobs have been sent overseas and replaced with low-wage service jobs in the retail and hospitality sectors. Because this low-wage, anti-union employment model was pioneered by Wal-Mart, which is the largest employer in the US, I have labeled it a Waltonist growth regime (as opposed to the previous Fordist growth regime during the 1950s and ‘60s when Ford and GM were among the largest employers).

These organizational and institutional transformations, resulting from global capitalist competition, have produced the declining wage share. The macroeconomic question is whether a declining wage share and hence lower consumer demand depresses growth or whether private and public investment can autonomously generate effective demand, compensating in the aggregate for any decrease in consumption demand.

Heterodox economists Amit Bhaduri and Stephen Marglin examined this question in a 1990 article. If a declining wage share does not reduce GDP growth, because investment demand compensates for declining consumer demand, then a regime is called profit-led. If, however, a delinking wage share generates slower growth, the regime is wage-led (or, what is the same thing, if the wage share increased, then growth would increase, hence the term wage-led). In the latter case, a redistribution of income away from profits to labor would improve the overall health of the economy.

In a 2008 article, heterodox economists Eckhard Hein and Lena Vogel found that the US, UK, France and Germany were all wage-led. This finding was confirmed for the US in a 2010 article by heterodox economists Özlem Onaran, Engelbert Stockhammer and Lucas Grafl.

In the 2012 ILO study mentioned above, Onaran and colleagues examined 16 of the G20 countries that had available data. They found that every county was wage-led. In addition, when considering all of the countries as a single economy, the entire global economy is wage-led. They conclude that “the world economy as a whole is a closed economy. If competitive wage cuts or wage moderation policies are pursued simultaneously in a large number of countries, competitive gains will cancel out and the regressive effect of global wage cuts on consumption could lead to a worldwide depression of aggregate demand.”

These findings have direct relevance for policy in the current crisis. As Özlem Onaran explained in her summary of her ILO study, “mainstream economics continues to guide policy towards further wage moderation and austerity as the main response to the Great Recession. Mainstream economists and policymakers treat wages merely as a cost item. However, in reality wages have a dual role affecting not just costs but also demand.”

Sociologists have a lot to add to this discussion, in terms of both academic research and policy. In particular, sociological research uncovers and explains the organizational and institutional mechanisms behind these macro movements, mechanisms such as deunionization, employment externalization and the rise of job polarization and precarious employment. For instance, the seminal study on job polarization in the US was published in a 2003 article by sociologists Erik Wright and Rachel Dwyer. And sociologists Donald Tomaskovic-Devey and Ken-Hou Lin found in a 2011 article that mechanisms associated with financialization – the growing importance of financial sectors and the increasing focus on financial activities by non-financial firms – have helped to redistribute income from wages to profits.

In the other direction, these macroeconomic studies provide complementary evidence on how regressive institutional and organizational changes identified by sociologists generate declining macroeconomic performance. Heterodox economics, the sociology of work and economic sociology have a lot to learn from each other.