By Jock Finlayson

An odd feature of today’s economy is the juxtaposition of widespread worries about talent and labour scarcity together with evidence that the share of total income accruing to workers is under downward pressure.

While CEOs, human resource managers, and business gurus proclaim that recruiting, retaining and motivating skilled employees is key to their organizations’ success, a large body of economic data presents a different picture – a picture of mainly stagnant real (inflation-adjusted) earnings for many workers.

Labour Losing Ground to Capital
A new study from the Organization for Economic Cooperation and Development (OECD) confirms that “labour” has been losing ground to “capital” in almost all advanced economies. It finds that from 1990 to 2009, the share of labour compensation in national income declined in 26 of 30 developed countries.

Overall, while workers garnered 66 per cent of national income in OECD member states in the early 1990s, by the end of the last decade the proportion had dwindled to 60-62 per cent.1 The drop may seem small, but it is striking because in the four decades prior to 1990, the shares of income flowing to workers and capital tended to be very stable.

Only recently have workers collectively been getting a noticeably smaller slice of the pie.

In a world where qualified workers often seem hard to find, how are we to understand labour’s slumping income share? The aftermath of the 2008-09 recession and the global financial crisis no doubt has played a role in tempering wage gains. However, academic research points to other factors that have also contributed to the trend.

Technology Impacts Labour Share
One of the most powerful is the way technological change has re-shaped the workplace and altered the incentives for businesses to use labour and capital in the production process.

In particular, ongoing advances in and greater use of information and communications technologies (ICTs) have reduced the relative price of capital goods, inducing many businesses to shift away from labour and to deploy more capital in their operations. This dynamic—well-established in manufacturing, and now spreading to many service industries—has eliminated lots of middle-income jobs.

According to one recent study, decreases in the relative prices of capital goods account for about half of the observed fall in the labour share of national income in advanced economies.2

Globalization Affects Bargaining Power
Globalization and most nations’ increased reliance on international trade have also affected the job market. Across broad swathes of the economy, lower trade barriers and heightened competition from imports have lessened workers’ bargaining power.

Among OECD economies, rising import penetration, particularly imports sourced from emerging markets like China, is associated with a diminishing labour income share in the affected industry sectors (although it must be noted that this is partly offset by employment gains in export-oriented sectors whose growth has been enabled by trade liberalization).

Accounting for Institutional Change
A third candidate explanation for the lower percentage of national income now collected by workers is what economists refer to as “institutional change”: falling union density, a shift toward temporary and other forms of non-standard work, and the gradual disappearance of defined benefit pensions in the private sector. Employer pension contributions and other non-wage fringe benefits are counted as part of labour compensation, and thus serve to boost workers’ share of total income.

Education Key to Skills Mismatch
It’s difficult to square labour’s falling share of economy-wide income with often heard complaints about an insufficient supply of qualified workers. To some extent, the business organizations voicing such concerns are likely reacting to mismatches between the pool of available skills and what employers are looking for when they seek to fill vacant positions.

Skills mismatches are certainly a factor in the contemporary job market, reflected in part in high rates of underemployment among recent post-secondary graduates. Dealing with mismatches requires, inter alia, expanding education and training capacity in high-demand fields and reducing the resources allocated to lower-demand occupations and areas of study.

Relative Pay in a Market Economy
However, an important part of any economically sensible strategy for reducing skills mismatches must involve boosting pay in occupations experiencing shortages in qualified workers. In a market economy, price adjustment is at the heart of the efficient allocation of resources— and in the labour market context, this means change in absolute and relative pay rates.

As labour force growth slows amid the coming wave of baby-boomer retirements, the income dynamics playing out in the job market may shift again. Canadian employers will have to become more attentive to the whole issue of competitive compensation.  Business models based on low-wage employment may become less viable in the future.
Looking further ahead, a tightening labour market could even reverse the recent fall in the labour share of national income. That would be no bad thing.

Jock Finlayson is the executive vice-president of the Business Council of BC.

(PeopleTalk Winter 2013)