Globalization, Technology and the Decline in Labor Share of Income - PowerPoint PPT Presentation

Globalization, Technology and the Decline in Labor Share of Income Mitali Das Strategy, Policy and Research Department. IMF 1

The global labor share of income has been on a downward trend E volution of the Labor Share of Income (P ercent) 56 45 55 44 54 43 53 42 52 41 51 40 50 39 49 38 48 37 A E s 47 36 E MD E s (right scale) 46 35 45 34 44 33 1970 75 80 85 90 95 2000 05 10 14

Declining labor shares are associated with rising inequality. Labor Shares and Income Inequality 65 Levels 12 W ithin-C ountry C hanges ini coefficient, annual deviation from country mean (A nnual) 10 N et/disposable y = – 0.308***x G ross y = – 34.397***x 55 8 2 = 0.08 R + 62.053 6 2 = 0.1049 R ini coefficient 45 4 2 G y = – 38.319***x 35 0 + 50.459 2 = 0.1305 R – 2 – 4 25 – 6 G – 8 15 – 8 – 6 – 4 – 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0 2 4 6 8 10 Labor share Labor share, annual deviation from country mean (percentage points)

Key Questions ▪ How widespread is the decline in the labor share of income across countries, industries and skill groups? ▪ What are the key drivers of the labor share of income and through what mechanisms do they operate? ▪ Do the drivers vary between advanced economies (AEs) and emerging market and developing economies (EMDEs), industries, and skill groups? ▪ How have technology and globalization affected labor shares? What has been the role of exposures to routinization and participation in global value chains (GVCs) in declining labor shares?

Preview of Key Findings ▪ The decline in labor shares is widespread, though heterogeneous, across countries, industries and skill groups. ▪ In advanced economies s it reflects predominantly the advance of technology; global integration is a contributing factor, particularly in tradable sectors. ▪ In emerging and developing economies, it reflects predominantly the forces of global integration, notably the trend increase in participation in GVCs. Importantly, this could be a benign development: a result of capital deepening that is not necessarily accompanied by dislocation of employment or reduction in wages. ▪ “Routine - biased” technology and participation in GVCs have lowered the labor share of medium-skilled labor.

The global decline in labor shares conceals significant heterogeneity in evolutions across countries and industries E stimated Trends in L abor S hares by C ountry and S ector ountry, 1991 – 2014 8 E stimated Trends in L abor S hares by C (P ercentage points per 10 years) 6 4 2 0 – 2 – 4 – 6 C H N C O L H K G IR L P O L A U T IS R N O R N LD C A N C H L JP N K O R IT A H U N C H E B E L C Z E F R A P E R N Z L U K R A R E B R A MY S K A Z ID N V E N A R G D E U Z A F R O U T U R P R T U S A F IN IR N A U S S G P ME X MA R E S P E G Y S W E D N K T H A G B R R U S G R C P H L ector, 1998 – 2014 E stimated Trends in L abor S hares by S 4 (P ercentage points per 10 years) 3 2 1 0 – 1 – 2 – 3 – 4 Manufacturing Mining T rade C onstruction R eal estate A ccommodation T ransportation H ealth services F inancial services U tilities A griculture

…and across skill levels, with a most pronounced decline among the medium-skilled. L ab o r Sh are E v o lu tio n b y Skill L ev el (P e rce n t) 34 20 1. A dvanced E co no m ies 30 2. E m erging Market and 20 D evelo ping E co no m ies 32 18 28 18 Middle 30 16 26 16 Lo w H igh (right sc ale) 28 14 24 14 H igh Middle 26 12 22 12 24 10 20 10 22 8 18 8 20 6 16 6 18 4 14 4 1995 2000 05 09 1995 2000 05 09 Sources : W orld Input-O utput D atabas e; and IMF s taff calcula tions . N ote: AE s = adv anced economies ; E MD E s = emerging market and dev eloping eco nomies .

What are the Key Drivers of the Labor share of Income? • Technology – Relative price of investment goods – Exposure to automation in routine occupations • Global integration (Trade, Financial) – Trade in final goods – Intermediate trade: participation in global value chains – Financial integration • Policies and Institutions – Corporate taxes, Unionization, Reforms in product and labor markets • Measurement – Depreciation, self-employment

Result 1: Changes in labor shares are not due to structural transformation. Labor shares have declined in all sectors. Shift-Share A nalysis Labor Share Trends, W ithin versus Total, O ne-Digit ISIC Labor Share Trends, W ithin versus Total, Two-Digit ISIC 15 10 (Percentage points per 10 years, 1990 – 2014) (Percentage points per 10 years, 1992 – 2007) 8 10 6 4 5 2 ithin ithin 0 0 W W C hina – 2 – 5 – 4 A E s E MD E s – 6 – 10 – 8 – 15 – 10 – 15 – 10 – 5 – 10 – 8 – 6 – 4 – 2 0 5 10 15 0 2 4 6 8 10 Total Total

Result 2: Technology is the key driver of aggregate labor shares in Advanced Economies, whereas globalization is the key driver in Emerging Economies. A ggregate R esults: C ontributions to A ggregate L abor S hare hanges, 1993 – 2014 C (D eviation from regression constant) 6 T echnology F inancial integration U nexplained 4 G V C participation P olicy/institutions A ctual change 2 0 – 2 – 4 – 6 – 8 A E s E Ms E Ms exluding C hina

Result 3: Global value chain participation is associated with declines in labor shares only in tradable sectors. S ectoral R esults, A dvanced E conomies: C ontributions to S ectoral L abor S hare C hanges 12 T echnology C ountry F E s U nexplained 10 G V C participation S ector F E s A ctual change 8 6 4 2 0 – 2 – 4 – 6 – 8 – 10 s – T s – N A E radables sectors A E ontradables sectors

Result 4: Technological progress and globalization have “hollowed - out” the labor shares of medium-skilled labor C o ntributio ns to A ggregate L abo r S hare C hange by S kill, 1995 – 2009 T echnology G lobal value chain participation 12 F inancial integration S kill supply and other composition shifts A ctual change 10 8 6 4 2 0 – 2 – 4 – 6 – 8 H igh skill Middle skill Low skill Middle-skill A E s

Policy Implications ▪ Policies should depend on country circumstances: level of development, extent of decline in labor shares, relative importance of underlying drivers, and existing social safety nets. ▪ In Advanced Economies: ▪ help workers cope with disruptions, including through skill upgrading and facilitating transitions, ▪ long-term investment in education, ▪ longer-term redistributive measures in line with social contract. ▪ In Emerging Markets and Developing Economies: ▪ Decline in labor share by itself may not call for policy intervention, but gains from growth should be shared more broadly. ▪ Challenges similar to those in AEs could arise as automation progresses – promote skill deepening to prepare for further structural transformation.

Acknowledgements: • The presentation draws on the research of Mai Dao , Mitali Das, Zsoka Koczan and Weicheng Lian , presented in: – “ Understanding the Downward Trend in Labor Shares of Income ”, World Economic Outlook April 2017 – “ Routinization, Globalization and the fall in Labor’s Share of Income ”, VOXeu.org, http://voxeu.org/article/routinisation-globalisation-and-fall- labour-s-share-income – “ Why is labor receiving a smaller share of global income? Theory and empirical evidence ”, IMF, Working paper WP/17/169.