Declining Labour Share in developing Countries

WAGE share among labour class is part of the functional distribution of National income in an economy. A higher wage share according to various empirical studies could lead to increase in domestic demand which has a positive effect on economic growth in terms of productivity and employment.

Sustainable Development Goal 8 aims at Promoting inclusive and sustainable economic growth, employment and decent work for all. Fair Income from productive activities and employment is part of decent work. In recent years labour shares have seen a downward trend globally with important negative consequences on economies. According to research, improvements in macroeconomic performance may not translate into commensurate improvements in personal incomes of households if there is declining labour share.  Socially it will lead to income inequality and politically erodes support for market-oriented economic policies or for globalization. According to ILO, at the macroeconomic level, declining trends in labour shares negatively affect the main macroeconomic aggregates, namely household consumption, private sector investment, net exports and government consumption.

Causes for Falling Wages

Mainstream economics consider globalization and technological progress as the key factors behind the declining wage share. Thus continuing regional and global integration and automation will increase the pressure on the falling wage share. Some other studies of political economy concentrate on institutional and social factors for declining wage rate. To them weakening of bargaining power of workers since 1980’s is responsible for falling wages.

Globalization, technological progress and deregulated financial markets give employers various options which exploit workers. Companies have option to move to low-cost countries, substitute labour with capital and invest in different options like real or financial assets internationally.

Again reduced market competition, welfare-state retrenchment, weaker income security and rising unemployment have pushed down wages share all over the world.

In advanced economies, labour income shares started showing downward trend in the 1980s, reaching their lowest level prior to the global financial crisis of 2008–09, and have not recovered materially since. Among most emerging market and developing economies labour shares have also declined since the early 1990s.

Declining Labour shares and inequality

According to ILO estimates of the distribution of labour income shows that pay inequality remains persistent in the area of employment. ILO findings indicate that 10 per cent of workers receive 48.9 per cent of total global pay, while the lowest-paid 50 per cent of workers receive just 6.4 per cent of global pay.

Again findings of ILO indicate that poor countries tend to have much higher levels of pay inequality. In Sub-Saharan Africa, the bottom 50 per cent of workers earn only 3.3 per cent of labour income, compared to the European Union, where the same group receives 22.9 per cent of the total income paid to workers. In South Africa labour share in GDP has also declined since 1993 leading to decline in their real income.

Recommendations

Commitment to sustainable development goals specifically Goal 8 requires efforts to curb downward trend in labour share.   Declining labour share has effect on global demand and employment. This affects economic growth and push economy towards recession. Government and International organizations have to make efforts to curb this downward trend.

National and International efforts are needed to contain present decline in labour share. National efforts in form of policy actions by government through amendments in wage and income policy, social security policy, Labour market reforms are recommended.  Labour market reforms will strengthen bargaining power of workers through empowerment. Sweden is a good example of such effort. Swedish workers have a strong bargaining position. In Sweden real wages of workers have increased by 60 per cent over the last two decades. This has been combined with the highest employment rate in the EU. In Sweden globalisation, technological progress and free trade is regarded as opportunities.

Dr Jaya Shukla is a Lecturer Mount Kenya University Kigali