Globalisation and Labour Share

Pawel Bukowski

According to the Karabarbounis and Neiman (2014) the global labour share of output fell from 65% in 1980 to 59% in 2012. Over the same period, US labour productivity has grown by 90%, but the median real wage grew only 10%. This contradicts the standard Cobb-Douglas production function used in competitive macroeconomic models. An answer may be that globalisation has changed the power structure in labour markets. Our project for Rebuilding Macroeconomics challenges the competitiveness of factor markets and the edifice of the distribution of income.

David Autor et al. (2017) have recently built on Michal Kalecki’s seminal analysis of oligopolistic economy by reconnecting the observed structural change in the functional distribution of income with the market power of companies. When workers receive less from what they produce and the rents or surplus are directed towards increasingly concentrated capital, characterised by rising firm mark-ups, wage and income inequalities arise. This profound shift rekindles debates about whether growth benefits the workers from Ricardo to the highly influential work of Thomas Piketty.

Globalisation has been identified as one of the major driving forces behind the falling share of labour income. Ways in which this occurs include relocating manufacturing to developing countries, the transfer of capital-intensive technologies or trade-induced changes in the relative price of inputs. Perhaps surprisingly, relatively little attention has been paid to the effect of globalisation on the bargaining power of workers at the heart of wage-setting process. Yet there is growing evidence that shows a rising market power of companies over labour.

Globalisation might affect the position of workers through at least two channels. First, with global value chains, foreign investors or multinational companies may no longer build supply chains in the host countries thereby limiting productivity spill-overs to domestic companies and sectors. This may break, or temper, the connection between the productivity of the company and the domestic demand for labour. Trading companies may face relatively weak upward pressure on their wage bill even as they earn higher profit margins.

Second, when firms offshore part of their production, they tend to reallocate domestic workers and output from manufacturing to other sectors. The relocated workers might have lower bargaining power in the new sector because of weaker unionization, lower demand for specific human capital or higher competition from other providers of business services (creating the threat of domestic outsourcing).

Should one expect the same effect of globalisation on the bargaining power of workers across all countries? Different institutional arrangements might induce similar firms to respond differently to similar forces. Hall and Soskice (2001) distinguished two broad categories of economies. In Liberal Market Economies (LMEs), such as the US or UK, firms rely on competitive, arms-length market based interactions. By contrast, in Coordinated Market Economies (CME), like Germany, firms engage much more in non-market forms of cooperation and coordination.

Offshoring production would be expected to be more common in LMEs, where the labour markets are flexible and workers mostly acquire general human capital. Companies from such environments might find it easier to reallocate their domestic production workers to other sectors and substitute them with foreign workers. On the other hand, CMEs are based on long-term employment contracts and worker’s skills are specific to firm or industry, making off-shoring harder.

Another example is the internationalisation of finance. Because CMEs traditionally engaged more in non-market relationships with financial institutions, the emergence of global financial markets may have a larger impact on them. This might force them to refocus on shareholders, short-run rates of returns and more aggressive market strategies at the cost of long-term profits and symbiotic cooperation with other domestic companies. Consequently, the role of international finance might weaken the connection between productivity and the demand for domestic labour more in companies from CMEs than from LMEs.

Answering the question of how globalisation affects the position of workers might be a key for understanding why developed economies have experienced a falling labour share, real wage stagnation and a decoupling between wage and productivity growth. We need to understand the effect of local labour market institutions on wages changes when companies develop international global value chains. There may be a risk that two-speed or dual-economies – with highly productive multinationals and less productive domestic companies – limit how the gains from globalisation are shared with labour.

In this project we will examine whether and how globalisation may have changed the extent to which workers can benefit from the growth of companies.

Autor, D., Dorn, D., Katz, L. F., Patterson, C., & Van Reenen, J. (2017). The Fall of the Labor Share and the Rise of Superstar Firms. CEP DP 1482. Centre for Economic Performance, LSE.

Karabarbounis, L., & Neiman, B. (2013). The global decline of the labor share. The Quarterly Journal of Economics, 129(1), 61-103.

Hall, P., & Soskice, David W. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press.

Pawel Bukowski (Centre for Economic Performance, LSE)

Twitter: @pwlbukowski