Why workers are losing their share of Australia's national income

Extract from The Guardian

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Australian trade unions

Grogonomics

Greg Jericho

If you want to tackle inequality, the first thing you should do is join a union – a report puts the premium on wages for private sector union workers at 20%

• Greg Jericho is a Guardian Australia columnist

‘The link between the decline in unionisation and the decline in labour’s share of income was “highly statistically significant” and contributed around 19% of the fall in the labour share of income.’ Photograph: Dave Hunt/AAP

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Tuesday 15 August 2017 04.00 AEST Last modified on Tuesday 15 August 2017 06.09 AEST

It is now apparent that the issue of inequality is the economic topic of 2017. One of the clearest signs of the problem is how the national economic pie is split up – the latest GDP figures show the share of national income going to employees at 50-year lows. A recent study by the IMF looks at why less of the economic pie is going to workers – and finds that while global forces are at play, the drop in union membership is a significant factor.
The fall in the share of national income going to workers is neither a new thing, nor something which is unique to Australian workers.

Indeed, in its April Work Economic Outlook the IMF devoted a chapter to the issue. It found that the share of national income going to labour had fallen during the 1970s and 1980s, levelled off somewhat in the 1990s and then fell again in the first decade of this century:

Australia is certainly not excluded from this experience. The decline in the share of income going to Australian workers is in line, and possibly even worse, than in the USA and Canada over the past 45 years:

This has real consequences, because declines in the share of income going to labour is quite solidly linked to rises in inequality:

The reasoning is pretty obvious – wages are more evenly spread across households, whereas income that comes via capital (profits from investments) is more concentrated at the higher end of the income scale.
But the question is: why has the share of income going to labour fallen across advanced economies, and what is to blame?
To answer this question, the IMF has recently released another paper which looks at the issue with relation to the USA. Rather than look across different advanced economies, this paper looks across different industries within the USA to see whether the fall in the share of income going to labour is due to industry-specific factors, or perhaps because of the changing nature of work – such as workers going from high paying jobs to lower paying ones.
While the USA’s economy is different in size and make-up from Australia’s, there are enough similarities that make for a good comparison.

The paper found that three main factors caused the decline in labour share of income, and they would be familiar to many Australian workers.
First, the paper found that the causes were not industry-specific or geographical, but that “the decline in the labor share [was] common across most states and industries, with varying degrees”. This means the fall of income going to labour was not because people had shifted to lower paying work in lower paid areas of the country, but that the decline occurred in all industries – even high paying ones.
The biggest factor was “technological change” – mostly from automation of routine tasks. The rise of robots can not only reduce the need for labour in certain jobs, it also redistributes the income from the worker to the employer.
The second biggest factor was that of globalisation. Perhaps surprisingly, here the authors are not talking about the ability to offshore work. Indeed, they found there was no link between the level of offshoring and declining labour share of income.
What was important was the competition the industry faced from imports and also the level with which the industry was dependent upon imports to make its products.
And the final factor was the fall in unionisation. More important than the impact of technological change and trade, the link between the decline in unionisation and the decline in labour’s share of income was “highly statistically significant” and contributed around 19% of the fall in the labour share of income – roughly the same as that contributed by import competition.
The paper noted that in the USA, the number of private sector workers who are union members has dropped by 19% since the early 2000s. Such a drop has also occurred in Australia. Since 2011, the number of private-sector workers in a trade union has dropped 14%:

But the drop among public-sector workers has been even larger – down 18% since 2011. This has seen the percentage of public-sector workers in a union fall from 43% in 2011 to 39% in 2016:

And the decline is but part of a very long-term trend. It is scarcely hard to credit that in 1990, 40% of all Australian workers were in a union, compared to just 15% now:

That fall in the number of workers represented by a union represents a decrease in the ability for workers to bargain effectively for pay rises. The paper notes that in the USA, the premium on wages in the private sector for union workers is around 20%.

The report in some ways is depressing reading for workers. Given the economic benefits of technological improvement and trade, introducing polices to restrict such a thing in the name of improving workers’ incomes would be woefully misguided.
Some factors however do have positive impact – the big one being education. The study found that “labour share declined less (or increased more) in industries that experienced a larger increase in the average education and experience of its workforce”.
But while this would suggest increasing the skills of workers and encouraging people to stay in school or go on to further study is important, the report highlights the massive tidal wave of economic forces against which workers are battling.
It noted that to completely offset the drag on labour income that comes via the technological change of automation, average schooling in the USA would need to increase by about 2.5 times more than it has since the early 2000s.
The forces of economic change and globalisation are here to stay, and while this report finds that policies which encourage education and the improvement of worker skills will improve workers’ share of income and help in the fight against rising inequality, it also makes clear, that the fastest and easiest solution is to join a union.