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.