Human Development

Research Paper
The Declining Labour Share of
Income

BATCH 1
KRITI BANSAL
190201055
INTRODUCTION

The case study helps in understanding how societal income and output is distributed. Most
research done is this field focus on
1. Examining interpersonal inequality among individuals or households
2. The functional distribution of income or the distribution of output between the labour
share of income and the capital share of income
The less attention given to the latter led to a further research in this area. Looking at the
factor share of income involves comparing the returns earned by labour and the returns
earned on ownership of capital. Factor shares of income are thus, critical variables in the
measurement of the productivity of economies. In fact, to determine the credibility of
theories of macroeconomics, knowing if the labour share is stable or declining, becomes very
important. The study revolves around the same topic done over the last three decades.

SOURCES

The evidence for the same comes from two sources:

The United Nations Industrial Development Organization (UNIDO) database
It is a database of industrial surveys to measure the economic activity in the manufacturing
sector. It collects economy wide data for 181 countries. The data is collected through
questionnaires and then checked for consistency and errors. The labour shares in this
database is given as the ratio of wages and salaries to value added.
The United Nations (UN) dataset
The national accounts survey of UN provide data on labour share for the whole economy, as
well as its constituent sectors. This survey provides data for eleven subsectors of the economy
along with the data of 129 countries as a whole. The labour shares in this dataset is given as
the ratio of compensation of employees to gross value added.

TRENDS

Considering the global trends, following points are worth mentioning to know the changes in
labour share of income:
1. The time trend presented by both the data sets show that labour share is relatively
constant or even slightly increasing until 1980. There is a statistically significant
negative coefficient on the time trend for both datasets, and this is driven by the
decline in labour shares in the period following 1980. 1980 is used as a rough
breakpoint since it marked the beginning of many important changes in the economy.
The UN dataset is adjusted for two issues – the Gollin issue (for which we add the
operating surplus from private unincorporated sector in the overall labour share) and
 the Wooldridge issue ( for which we give probability weights to labour shares and run
a trend regression using them)

2. The trend analysis based on regions depict that except East Asia (UN) and Central Asia
(UNIDO), every region of the world experienced a decline in labour share of income.
For most regions, it happened in the later years.

3. When dividing the data into quartiles of per capita income, it can be seen that
important structural shifts that occur with increased income are a shift from
agriculture to more organized sectors, demographic changes and urbanization. It was
also evident that manufacturing labour share increases with the increase in income.

4. Data has been provided for Human Development Index (HDI) quintiles too. Just like
other regression analysis, it was clear that all quintiles had a negative relationship
though, not statistically significant.

5. Looking at all the analysis done till now, it is possible that the decline in labour shares
observed is not due to lower labour shares within each sector but rather the
consequence of the structural change in sectors that have lower labour shares
because of technological or other reasons. Thus, to further study this, a simple
regression was carried out to compare the contribution of labour share declines due
to changes within the sector relative to what may be termed a static shift (i.e. growth
or decline in labour shares due to movements of economic activity into sectors that
have higher or lower labour shares.)

The regression analysis revealed – between 1980 and 2000, within sector declines
accounted for 80% the overall decline in labour share (UN) and more than 100%
(UNIDO). Thus, it can be said that declines are primarily driven by decreases in intra-
sector labour shares.

CONCLUSION

Recent attempts at linking inequality and growth have ignored factor shares. However, the
functional distribution of income is likely to be important if interest groups are organized
along class lines and changes in institutions and in policies affect these relationships. The
labour share is an indicator of the returns to the majority of the population, and the results
suggest a significant decline in the power of one group (owners of labour) relative to another
(owners of capital).