by JP Landman

Change in share of benefits from economic growth

Capital’s share on the up and labour’s declining

JP Landman: labour and capital no longer gain equally from growth
JP-Landman.jpg

For half a century, post World War II, the division of the spoils of economic growth between labour and capital remained stable. “It seemed as if some unwritten law of economics would ensure that labour and capital would benefit equally from material progress,” writes the International Labour Organisation (ILO) in Chapter 5 of its Global Wage Report 2012/13. That “law” however, 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.

At this point, South Africa, however, seems to be an exception to the trend in what might be a ”flash in the pan” or a precursor of things to come, writes political analyst JP Landman on his website

In another article we take a look at the tensions building in the relationship between capital and labour in especially the European Union.

Global trends

       The OECD calculated that between 1990 and 2009 labour’s share in national income declined in 26 out of 30 developed economies from a median share of 66.1% to 61.7%;

       In a different group of countries -- the US, Eurozone, Japan and the UK -- economist Gavyn Davies in a June blog post sums it up as  “the gross profit share has risen by about 10% of 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 wage shares in Latin America;

       Even in China, where wages roughly tripled over the last decade, GDP increased at a faster rate than the total wage bill; and

       The global financial crisis seems to have reversed the trend only briefly, after which it resumed.

 

And, this has happened in spite of increased labour productivity.

In the US, for example, hourly labour productivity in the non-farm business sector has increased by around 85% since 1980, and real hourly compensation by only about 35%.

In Germany, labour productivity grew by 22.6% over the past two decades, while real monthly wages remained flat. The ILO says 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”.

According to Davies “…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.

So the last 20 years or so was a good time to be a shareholder, a bad time for some workers, depending on their work category.

Studies in developed economies have found that wages of low- and medium-skilled workers are driving the decline, while for skilled workers educated to tertiary level and above their wages increased.

Even a rise in low-skilled jobs did not benefit low-skilled workers, as these jobs were taken by over-qualified workers with intermediary levels of education.

Going up the ladder, the higher echelons of workers are even better insulated against the trend. If the compensation of the top 1% of earners was excluded, the drop of the labour share would be even greater.

According to the ILO report “this reflects the sharp increase, especially in English-speaking countries, in the salaries (including bonuses and exercising stock options) of top executives, who now cohabit with capital owners at the top of the income hierarchy”.

Although the top 1% are also nominally employees, they had their snouts in the trough of rising company profits and dividends, not so much due to skills, as to  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 who did not share in profits or rents: the middle-classes and lower-skilled people.

 

South African trends

With one possible exception, these trends seem to hold for South Africa.

Going back to 1946 the compensation of employees as a percentage of GDP ranged between 55% and 60%. Then in 2000 the trend started to change decisively. Compensation as a percentage of GDP declined to an all-time low of 49,4% in 2008, despite labour productivity increasing substantially.

From 1970 to 1994 labour productivity increased by less than 1% a year. Between 1995 and 2012 it increased by more than 3% a year. But this did not help the workers to stem the decline in their share of national income. Exactly the same trend as experienced globally.

Is there change coming? Maybe.

For the four years since 2008 employees’ compensation has increased somewhat to 51.8%. The quantity of the change is not big but the direction is. Labour’s share has increased for four years in contrast to the global trend. 

Whether this change in direction is a flash in the pan, or is something more permanent we will see over the next few years. If indeed permanent, it will certainly be an exception to global trends. Or could it be a precursor?

Is there a link between the change in direction and the higher strike action we have seen since 2007?

Andrew Levy and Associates’ strike data shows a marked increase since 2007, and labour’s share started rising in 2008. Pure coincidence? It would seem that power is not just at work in the remuneration committees in favour of share options but also at work on the shop floor.

If correct, this would explain the current wave of strike action and militancy in the mining sector. Amcu president Joseph Mathunjwa condemned company executives who “earn millions of dollars, and then lay off workers claiming low platinum prices”. And, Cosatu president, Sidumo Dlamini warmed to the same theme claiming Lonmin’s financial officer is paid “152 times as much as a rock drill operator at the mine”.

 

Conclusions 

These are tectonic shifts taking place in the world. What will the consequences be?

       If labour’s share does not keep on falling, the consequences for shareholders can be painful. The ILO reports that much of the income transferred from labour to capital has been used to pay increased dividends. And Davies calculates that if the 10% decline in the wage share had not occurred, gross profits in those economies would have been about one-third lower, and net profits (after depreciation) would have been about two-thirds lower. He warns: “Equity markets would indeed be very vulnerable if the decline in the wage share started to reverse on a permanent basis;”

       If the decline continues unchanged and while  there is a rise in public unrest and dissatisfaction globally, will people go out onto the streets because of some change in a GDP ratio? No, 99.99% 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 … have 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” reports the ILO; and

       A decline in the purchasing power of large parts of the population affects demand and thus economic growth. The rich may try and make up for it by spending more on cars, private planes and caviar but it is unlikely to make up for the declining purchasing power of the bulk. Simple mathematics. 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 Dr Anton Rupert concluded after the Hiroshima bomb, “We are all scorpions in the same bottle, vulnerable to one another.” By the way, he was heavily criticised when he introduced a minimum wage of one pound a day in his factories in South Africa at a stage when actual wages were much lower. But then he always did see the bigger picture.

(This is a slightly shortened and adapted version of a recent article by political analyst JP Landman)

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