As mentioned above, sustainable development covers the economic, social and environmen-tal system. Each of the 17 SDGs can be primarily attributed to one of the systems, but they also touch the other dimensions to a greater or lesser extent. The dimensions of sustainabil-ity and the several SDGs are therefore connected to each other in multiple ways and build an integrated system and network of goals (Barbier and Burgess, 2017, Le Blanc, 2015). The links between the goals can be positive as well as negative, creating synergies and trade-offs.
Thus, although the labor share primarily refers to inequality and hence the social system, it further affects the economic system (through its impact on income and poverty) and to some degree also the environmental system.
The fact that labor has been losing ground against capital since the early 1990s, not only in high income countries but also in the developing world, can in part explain the substantial increase inpersonal income inequality, i.e. inequality in income between individuals, that is observed in many developing countries. The personal income distribution is linked to the factor income distribution through factor ownership and can be derived from it once it is known how capital and labor are distributed among people (Ray, 1998). The factor
in-come distribution is therefore a statistical determinant of the personal inin-come distribution.
The relationship between the personal and factor income distribution is complex but several studies show that a lower labor share is associated with higher inequality in personal in-comes (as measured by the Gini coefficient), mainly because profits, rents and other income from capital are concentrated amongst the rich (Bengtsson and Waldenström, 2015, Daudey and García-Peñalosa, 2007, ILO, 2013, Rani and Furrer, 2016). This is also suggested by Figure 1.3 which shows that average labor shares and average Gini coefficients develop in opposite directions: Across country income groups, a decrease in the labor share since 1990 came along with an increase in personal income inequality. The labor share is therefore a highly informative macroeconomic variable to explore when analyzing the roots of personal inequality. As has been emphasized by Atkinson (2009), shifting the focus from the per-sonal to the factor level can deliver a more integrated understanding of the determinants of inequality between individuals. It might not only be relevant how income is distributed but also how it was earned. By decomposing inequality into factor shares and their concentra-tion, the underlying causes of income disparities can be more easily grasped. Eventually, the labor share plays a role in the discourse on inequality since factor shares also “address the concern of social justice with the fairness of different sources of income” (Atkinson, 2009, p. 5). For example, people might consider it an injustice when capital profits are increasing faster than wages (Glyn, 2009). This is also because employment not only has an income aspect but also a social function. Having a decent job can be a source of self-esteem and the esteem of others, a function which Sen (2000) terms “recognition aspect” (p.5). In that sense, income from work also differs from earnings that come from charity or social transfers (Ray, 1998).
Given that production factors, especially capital, are still very unequally distributed within societies, a decreasing labor share is a significant barrier in reducing poverty. As the poor are largely dependent on productive and remunerative jobs to generate income, the decoupling of wages from productivity has slowed down poverty alleviation. There is a large body of literature which shows that it is mainly labor market dynamics, i.e. more decent jobs and increasing wages, that lifts people out of poverty (see Besley and Cord, 2007, Melamed et al., 2011, WB, 2016d and others for country examples). Hence, poverty would have receded more quickly if productivity increases had translated to a greater extent into increases in labor income in the past. But on the contrary, the decoupling of wages from productivity has fostered the phenomenon of the working poor, a phenomenon which prevents people from climbing into the middle class (see table 1.1). Working poverty is the headcount of employed people whose incomes fall below the poverty line. Although the
1.1 The role of labor in sustainable development 9 share of extreme working poor (incomes below 1.25 USD a day) has decreased from 45.1 to 14.4 % and the share of moderate working poor (incomes below 2 USD a day) from 68.6 to 32.2 % in total employment since 1991 in the developing world, the progress in the least developed countries has been limited (ILO, 2014a). In absolute numbers, extreme working poverty has increased from 133 to 138 million and moderate working poverty from 176 to 242 million in income economies between 1991 and 2013. As a result, 375 million em-ployed people in the developing world still lived in extreme and 839 million in moderate poverty in 2013. This implies that about one third of employed people in developing coun-tries are poor (despite working) and that about 90 % of poor people are working (Fields, 2011, ILO, 2014a, WB, 2016d). The challenge in developing countries is therefore not to reduce unemployment but to create decent, well-paid jobs. In fact, about two-thirds of workers in low income countries and about half of workers in middle income countries are working under vulnerable conditions, meaning that their work does not generate adequate earnings and formal arrangements and social security are likely to be missing.5 The 8th SDG therefore calls to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all” (UNSD, 2016) to increase the growth elasticity of poverty, i.e. the connection between the change in economic growth and poverty reduction. Target 8.2 of the goal further demands to “focus on high-value added and labor-intensive sectors” since those sectors are most likely to reach the poor. This relationship is also known in the literature as the “virtuous circle of links among growth, employment and poverty reduction” (Islam, 2006): The stronger the link between economic growth and the creation of decent employment, i.e. the higher the labor-intensity of growth, the more likely it is that growth will be pro-poor (ILO, 2013, Loayza and Raddatz, 2006, OECD, 2009).
Goal 8 is thus directly linked to target 10.4 which calls for a higher labor share.
Additionally, a high labor share is favorable for a stable political and macroeconomic environment, which might further help to reduce poverty and inequality among a country’s society. First, and as has been mentioned above, the higher the labor share, the more likely it is that improved macroeconomic conditions also translate into higher household incomes and that gains from a globalized economy are fairly distributed. This, in turn, could maintain people’s support for open markets. If, on the other hand, inequality is high and the poor have little hope of future income improvements, this might not only lead to the rejection of economic integration but also to social and political unrest, threatening future economic growth (Berg and Ostry, 2011, IMF, 2017). Second, labor income has a higher marginal
5The ILO classifies own-account workers (typically subsistence farmers or street vendors) and unpaid family workers as vulnerable workers.
Table 1.1: Working poverty, 1991-2013
Share of working poor in total employment in % Extreme poverty (1.25 USD) Moderate poverty (2 USD) 1991 2000 2007 2013 1991 2000 2007 2013 DCs 45.1 32.7 20.4 14.4 68.6 56.6 41.1 32.2 LICs 65.8 60.4 46.2 37.4 87.1 84.6 73.6 65.2 LMICs 45.7 37.5 27.3 19.4 74 68.2 57.3 48.2 UMICs 40.3 22.6 8.4 3.7 61.1 41.6 20.4 10.0
Total working poor in millions
Extreme poverty (1.25 USD) Moderate poverty (2 USD) 1991 2000 2007 2013 1991 2000 2007 2013
DCS 811 693 491 375 1234 1198 989 839
LICs 133 156 146 138 176 219 232 242
LMICs 293 292 245 190 475 530 514 471
UMICs 384 245 100 47 583 450 243 126
Note: Figures in PPP (purchasing power parity). DCs = Developing countries, LICs = Low income countries, LMICs = Lower middle-income countries, UMICs = Upper middle-income countries.
Source: ILO (2014a).
propensity to consume than capital income (ILO and WB, 2015, Onaran et al., 2011). A lower labor share therefore diminishes domestic demand, which leads to lower growth and an increased dependency on exports if investments do not rise by the same amount (ILO, 2013). Low labor incomes may further cause financial instabilities if capital incomes are invested in financial rather than productive assets (ILO and WB, 2015).
Finally, the labor share also touches the environmental dimension of sustainable devel-opment. Target 4 of the 8th SDG (decent work and economic growth) demands a lower domestic material consumption per GDP “to decouple economic growth from environmen-tal degradation” (UNSD, 2016).6 Economic output can be produced in a capital- or labor-intensive manner, depending on the composition of economic sectors and the degree in how far capital and labor can replace each other within a sector. A labor-intensive production has the advantage that it is on average much less pollution-, energy- and material-intensive than a capital-intensive production, as several (ecological) economists, such as Antweiler et al. (2001), Cole (2003, 2004), Cole and Elliott (2005), Zhang (2016), argue. This is be-cause (physical) capital is by definition composed of, produced by and operated by material resources, as well as by sources of energy, which, in turn, are produced by the support of material resources (Daly and Farley, 2011). Labor-augmenting technological change might
6Additionally, target 9.2 calls for a lower “CO2emission per unit of value added”.
1.1 The role of labor in sustainable development 11 therefore help to decrease dependence on material resources while at the same time sta-bilizing or even increasing the incomes of the working poor. In how far this is possible depends on the elasticity of substitution between production factors: The higher the elastic-ity of substitution, i.e. the easier labor can replace physical capital and material resources, the more likely it is that there are positive employment and labor share effects (Bovenberg, 1999, Bovenberg and van der Ploeg, 1996). On the downside, a higher labor share and the associated higher propensity to consume is likely to increase overallcarbon emissions.
As argued by Ravallion et al. (2000) and others, lower incomes also tend to have a higher marginal propensity to emit, creating a conflict between redistribution of incomes and cli-mate change mitigation. Indeed, higher income inequality (and thus lower labor shares) has been found to be associated with lower carbon emissions, at least in poor countries (Grunewald et al., 2017, Holtz-Eakin and Selden, 1995). The aggregated effect of changes in the labor share – from the production as well as consumption side – on the environmental system is therefore very complex and not clear.
On the whole, to achieve the ambitious set of sustainable development goals, it will be key to designing policies that consider and minimize trade-offs between the various goals of economic efficiency, social equity and environmental conservation (Barbier and Burgess, 2017, WB, 2016d). Given its diversified impacts on the social, economic and environmental system, the labor share is an integral part of this challenging task.