Labor force, income and productivity

First, I assess whether the decreasing labor share is the result of an increasing gap between labor income and total output (also termed the wage-productivity gap), or just the result of a decreasing number of workers. When GDP is constant, the labor share can decrease either as a result of falling labor incomes or as a result of a shrinking labor force (or a combination thereof). Most developing economies, however, have been growing during the last few decades (ILO, 2010). The question therefore is how far output increases have also translated into higher labor incomes: Do we observe a decline in the labor share because every worker gets a smaller share of overall output, or because there are fewer workers?

As can be seen in figure 3.6, total employment has increased in all regions over the period examined: Between 1991 and 2012, it almost doubled in Sub-Saharan Africa and the Arab States, it increased by around 50 % in Asia and the Pacific, Latin America and the Caribbean and South Asia and rose by about 11 % in Europa and Central Asia. At the same time, total employment is increasingly composed of wage employment. The share of self-employment is falling but remains on a very high level in all regions except for the Arab states and Europe and Central Asia. Similarly, the WIOD data suggests that the total working hours increased by 20.5 % between 1995 and 2009 and the UNIDO data suggest that the number of employees in the manufacturing sector increased by 29.8 % between 1990 and 2010.

As such, there is evidence that the decline in the adjusted labor share is not driven by a shrinking labor force. Also the decline in the unadjusted labor share cannot be explained with a smaller wage employment sector. In a growing economy, where the labor force is increasing (△L>0) and labor income per worker is constant (△w=0), capital income growth (△i×K) has to exceed the growth rate of the labor force (△i×K>△L) in order for a decline in the labor share to be observed (see Equation 3.3). This implies that the ratio between wages and total output (w/w×L+i×K) has to decrease by a larger percentage than the labor force is increasing. The gap between labor income per worker and productivity (wage-productivity gap) must have widened considerably over the examined period. If labor income per worker is increasing as well (△w,△L>0) – which is the case in most countries (ILO, 2017b) – capital income has to grow even faster to exceed the growth rate of total labor income (△w×L). The employment statistics therefore suggest that the slice going to labor is not only decreasing but also that the slice going to each worker is decreasing as well.

Table 3.4 regresses the labor force participation rate (LFPR) on the labor share to as-sess the relation between the relative size of employment and the factor income distribution.

The labor force participation rate is the share of the population which is active in the la-bor market, either by having a job or searching for one.² It is therefore an indicator of the relative labor supply in a country and should be positively associated with the labor share.

Interestingly, while a higher LFPR in the upper middle income countries is indeed posi-tively correlated with the labor share, the opposite seems to be the case in low and lower middle income countries. This correlation does not necessarily imply causation and further effort is needed to check whether there is also causation in place. However, I would like to mention the model of a dual sector economy by Lewis (1954) in this context as it might provide a causal explanation for this finding. In this model, a poor economy is divided into a low-productive subsistence sector and a high-productive industrial sector. As the latter is more productive, it can pay higher wages and people prefer to transition there and leave the subsistence sector. However, in the beginning, the industrial sector is relatively small and does not offer enough jobs to employ everyone. To attract workers, the industrial sector thus does not have to pay wages equal to productivity but just sufficiently higher wages than those in the subsistence sector. The model predicts that the higher the labor force participa-tion rate, i.e. the higher the labor supply, the more downward pressure is placed on wages in the industrial sector. As a result of these dynamics, the gap between wages and productivity increases and the labor share decreases (Gollin, 2014). In the course of development, the industrial sector develops and absorbs an increasingly higher share of the workforce such that the pressure on wages decreases. Eventually, wages are paid according to productivity and the labor share decline comes to a halt. If labor becomes scarce, an increasing labor supply may even increase the labor share. Column (10) regresses the LFPR on the UNIDO labor share data and therefore exclusively refers to the industrial sector. There seems to be no correlation in low income countries but a significantly negative correlation between the LFPR and the industrial labor share in lower and upper middle income countries. This is not expected by Lewis’ model and additional forces seem to be at work that increase the gap between productivity and labor income, as mentioned in section 3.4.

2The LFPR is usually higher in poorer countries, as people spend fewer time in education. In this sample, it is 71.6 % in the low income and 64 % in the middle income countries (ILO 2017).

3.5 The components of the labor share 79 Figure 3.4:Mean and change in labor shares by region, 1990-2011

24.6

East Asia & Pacific Europe & Central Asia Latin America & Caribbean

Middle East & North Africa South Asia Sub−Saharan Africa

Average of Labor Shares, 1990−2011 Change in Labor Shares, 1990−2011

Labor Share in % of GDP

Graphs by Region

Note: Exceptions of the given time range are WIOD unadj./adj.(1995-2009), ILO unadj./adj. (1990-2008) and UNIDO (1990-2010).

Figure 3.5:Mean and change in labor shares by income group, 1990-2011

26.3

SNA G1 SNA G2 Trapp PWT ILO adj.

WIOD adj. UNIDO

SNA unadj.ILO unadj.WIOD unadj.

SNA G1 SNA G2 Trapp PWT ILO adj.

WIOD adj.

UNIDO

SNA unadj.ILO unadj.WIOD unadj.

SNA G1 SNA G2 Trapp PWT ILO adj.

WIOD adj.

Low income Lower middle income

Upper middle income

Average of Labor Shares, 1990−2011 Change in Labor Shares, 1990−2011

Labor Share in % of GDP

Note: Exceptions of the given time range are WIOD unadj./adj.(1995-2009), ILO unadj./adj. (1990-2008) and UNIDO (1990-2010). Income group as of 2000.

Figure 3.6: Employment trends by region, 1991-2012

05001000150020000500100015002000

2040608010020406080100

19911994199720002003200620092012 19911994199720002003200620092012 19911994199720002003200620092012 Arab States Asia & Pacific Europe & Central Asia

Latin America & Caribbean South Asia Sub−Saharan Africa

Wage Employment Share Self−Employment Share Total Employment (in millions)

% in Total Employment

Source: ILO (2017b).

Table 3.4: Regression with labor force participation rate

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

VARIABLES SNA unadj. ILO unadj. WIOD unadj. SNA G1 SNA G2 PWT Trapp WIOD adj. ILO adj. UNIDO Low Income Countries

LFPR -0.096 -0.421*** 0.221 0.068 -0.204 0.200*** -0.351* 0.347 -1.302*** 0.220

[0.128] [0.106] [0.268] [0.216] [0.278] [0.072] [0.181] [0.347] [0.345] [0.309]

Year -0.126** -0.051 -0.300*** -0.925*** -1.045*** -0.244*** -0.592*** -0.356*** -0.603*** 0.130 [0.057] [0.056] [0.058] [0.098] [0.126] [0.026] [0.081] [0.076] [0.182] [0.121]

Constant 36.184*** 57.152*** 23.481 76.316*** 72.403*** 43.134*** 76.355*** 32.668 140.229*** 9.738 [9.102] [7.354] [17.873] [14.720] [18.960] [5.126] [12.872] [23.106] [24.013] [22.558]

Obs. 338 220 20 79 79 662 338 20 220 268

Countries 34 21 3 8 8 39 34 3 21 38

Lower Middle Income Countries

LFPR -0.130* -0.232** 0.111 0.099 0.148 -0.321*** -0.258*** -0.284 0.120 -0.762***

[0.071] [0.095] [0.186] [0.198] [0.179] [0.050] [0.082] [0.271] [0.176] [0.173]

Year -0.377*** -0.363*** -0.129 -0.587*** -0.452*** -0.172*** -0.703*** -0.315* -0.234** 0.188*

[0.039] [0.056] [0.113] [0.103] [0.093] [0.022] [0.044] [0.165] [0.104] [0.099]

Constant 48.688*** 58.011*** 35.088** 55.964*** 40.201*** 74.345*** 71.922*** 75.532*** 57.134*** 75.541***

[4.566] [6.020] [13.585] [12.548] [11.348] [3.192] [5.221] [19.770] [11.180] [10.757]

Obs. 636 488 81 182 181 902 636 81 488 445

Countries 64 56 13 26 26 72 64 13 56 58

Upper Middle income countries

LFPR -0.073 0.019 0.506*** 0.445*** 0.603*** -0.035 -0.022 1.504*** -0.072 -0.660***

[0.092] [0.116] [0.177] [0.169] [0.175] [0.067] [0.114] [0.494] [0.171] [0.229]

Year -0.271*** -0.380*** 0.016 -0.467*** -0.500*** -0.304*** -0.428*** -0.408** -0.504*** -0.336***

[0.031] [0.043] [0.060] [0.052] [0.054] [0.022] [0.039] [0.168] [0.064] [0.077]

Constant 47.042*** 48.610*** 9.104 28.375** 11.381 55.269*** 52.417*** -41.244 65.201*** 78.369***

[5.935] [7.469] [11.679] [11.137] [11.563] [4.324] [7.355] [32.534] [11.018] [14.779]

Obs. 413 312 129 229 229 652 413 129 312 322

Countries 45 32 13 24 24 52 45 13 32 38

LFPR = Labor Force Participation Rate, Standard errors in brackets, *** p<0.01, ** p<0.05, * p<0.1 Source: ILO 2017