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

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

2 The global labor share of income has been on a downward trend Evolution of the Labor Share of Income (Percent) AEs EMDEs (right scale)

3 Gini coefficient Gini coefficient, annual deviation from country mean Declining labor shares are associated with rising inequality. Labor Shares and Income Inequality 5 55 Levels Net/disposable Gross y = 3.397***x R 2 = Within-Country Changes (Annual) y =.38***x R 2 = y = ***x R 2 = Labor share Labor share, annual deviation from country mean (percentage points)

4 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?

5 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.

6 The global decline in labor shares conceals significant heterogeneity in evolutions across countries and industries Estimated Trends in Labor Shares by Country and Sector 8 Estimated Trends in Labor Shares by Country, (Percentage points per 1 years) 2 2 CHN COL HKG IRL POL AUT ISR NOR NLD CAN CHL JPN KOR ITA HUN CHE BEL CZE FRA PER NZL UKR ARE BRA MYS KAZ IDN VEN ARG DEU ZAF ROU TUR PRT USA FIN IRN AUS SGP MEX MAR ESP EGY SWE DNK THA GBR RUS GRC PHL 3 Estimated Trends in Labor Shares by Sector, (Percentage points per 1 years) Manufacturing Transportation Mining Health services Trade Construction Financial services Utilities Real estate Agriculture Accommodation

7 and across skill levels, with a most pronounced decline among the medium-skilled. Labor Share Evolution by Skill Level (Percent) 3 1. Advanced Economies Emerging Market and Developing Economies Middle Low 1 28 High 1 2 High (right scale) 1 2 Middle Sources: World Input-Output Database; and IMF staff calculations. Note: AEs = advanced economies; EMDEs = emerging market and developing economies.

8 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

9 Result 1: Changes in labor shares are not due to structural transformation. Labor shares have declined in all sectors. Within Within Shift-Share Analysis 15 1 Labor Share Trends, Within versus Total, One-Digit ISIC (Percentage points per 1 years, ) 1 8 Labor Share Trends, Within versus Total, Two-Digit ISIC (Percentage points per 1 years, ) China AEs EMDEs 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.

10 Result 2: Technology is the key driver of aggregate labor shares in Advanced Economies, whereas globalization is the key driver in Emerging Economies. Aggregate Results: Contributions to Aggregate Labor Share Changes, (Deviation from regression constant) Technology Financial integration Unexplained GVC participation Policy/institutions Actual change AEs EMs EMs exluding China

11 Result 3: Global value chain participation is associated with declines in labor shares only in tradable sectors. Sectoral Results, Advanced Economies: Contributions to Sectoral Labor Share Changes Technology Country FEs Unexplained GVC participation Sector FEs Actual change AEs Tradables sectors AEs Nontradables sectors

Result : Technological progress and globalization have hollowed-out the labor shares of medium-skilled labor Contributions to Aggregate Labor Share Change by Skill, 1995 29 12 1

12 Result : Technological progress and globalization have hollowed-out the labor shares of medium-skilled labor Contributions to Aggregate Labor Share Change by Skill, Technology Financial integration Actual change Global value chain participation Skill supply and other composition shifts 8 High skill Middle skill Low skill Middle-skill AEs

13 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.

14 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 217 Routinization, Globalization and the fall in Labor s Share of Income, VOXeu.org, Why is labor receiving a smaller share of global income? Theory and empirical evidence, IMF, Working paper WP/17/19.

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