I am worried about our tendency to overinvest in things and underinvest in people.– J. Galbraith
In the past several decades the world economy experienced a sizeable rise in the share of profits/capital in national income compared to the share of wages/labour. These trends were driven by a lower role played by trade unions, by rising market concentration as well as trends in IT and technical advancements in production.
Looking ahead, however, there may be reasons to expect a reversion of the share of labour in the coming years – a trend that may have significant implications for the evolution of the global economy. The economic effects are likely to be also complemented by political shifts favouring left-wing parties, with some of the regions (Latin America being a case in point) already starting to exhibit these trends.
One of the bellwether indicators of a potential resurgence in labour is the rise in the levels of unionization. In the US according to recent data from the U.S. National Labor Relations Board union representation petitions filed increased 57% YoY, while unfair practice charges rose 14% YoY between October 2021 and March 2022. Interestingly, these trends are corroborated by changing US public attitudes – a Gallup poll conducted in September 2021 showed 68% percent of Americans approve of labor unions — the highest rate since 71% in 1965 . Internationally some of the highest unionization levels in the world are exhibited by Nordic economies that at the same time are widely seen as possessing one of the most successful models of economic development.
In the political sphere pro-labour forces are starting to gain the upper hand. In Latin America left-wing parties are staging victories across the continent, including most recently and for the first time in decades in Colombia. In the US President Biden vowed to create a taskforce to boost union membership and staked a claim to being America’s most pro-union president . In the EU, discussions have been undertaken on the possibility of adopting a minimum threshold for collective contract coverage.
There are also drivers emerging that may underpin a rising trend in wages and social security transfers. In the corporate world, these changes will be driven in part by the ESG agenda, most notably its “S” (social) component. Companies adhering to the ESG paradigm will be increasingly focused on strengthening labour standards, lower the “gender gap” in wages as well as the overall inequality in remuneration. The ESG paradigm will also constrain corporates in relying on the suppression of labour costs as a short-cut to gaining competitiveness – instead there will be more importance accorded to labour education and training.
Perhaps the most important driver of the labour agenda in the developing world may be the rise of China and the economic model of development that it is likely to advance in the coming decades. This modernization model is likely to include a progressively greater emphasis on social security, consumption and services sector. Competition with the US in the technological sphere will also push China towards prioritizing the attraction of top talent cadres in the high-tech sector. At this stage for China the period of using low wages as a major competitive edge has given way to greater emphasis on attracting top talent and attaining technological leadership.
Labour, most notably high-skilled labour, is increasingly a scarce resource – sizeable labour shortages are reported in some of the most sensitive sectors for long-term growth globally, such as IT, medical care and education . These shortages are likely to be exacerbated by demographic trends and the effects of Covid have already resulted in adverse effects on the demographics and the labour market in both developed and developing economies. Importantly, apart from the spike in mortality there is also the changing pattern of demand for labour, as sectors such as IT and medical services are facing supply constraints in meeting rising demand.
There are also the problems and obstacles faced by capital in squeezing ever higher shares of national income compared to the relatively quiescent period of the past several decades. First and foremost, there are the risks faced by investors vis-à-vis the headwinds of systemically higher geopolitical risks, risks associated with climate change and cybersecurity risks. In the macroeconomic sphere the realm of negative real yields has steadily expanded on the back of the rising prominence of quantitative easing.
Another aspect in the rising prominence of labour is the interplay between political and economic factors as the political left-wing shift may favour a greater redistribution of national income towards labour. This trend towards a more left-wing political landscape is driven in part by record high levels of income inequality as well as the decades of underinvestment in human capital, most notably in health care – something that rendered the global economy highly vulnerable to the Covid pandemic.
The increasing role and share of labour is long overdue in the global economy. The main benefit from this long-term trend will be a greater emphasis placed in development on human capital, most notably in education and healthcare. Greater investment undertaken in these areas will support productivity growth and will serve to render economic development more sustainable. At the same time, the rising share of labour and wages in national income may result in a significant increase in the role of household consumption as a driver of economic growth.
It may also lead to a substantial revision in economic policy in terms of priorities and instruments used. Fiscal stimuli to support the economy may become more “labour-intensive”, i.e. they may start prioritizing social outlays and transfers. A modernized system of social support could include “smart Treasury” outlays that are targeted towards the segments of the population most in need of social assistance with improved targeting of social outlays attained on the basis of the use of “big data” and AI.
Prioritizing labour in economic development may also involve the transformation of economic policy rules. While existing rules have largely targeted macroeconomic stability as the prime target of employing monetary and fiscal policy rules, there may be a case for devising “labour-oriented” economic policy rules that establish minimum threshold levels of public spending for critical items pertaining to long-term social security. In particular, long-term minimum levels of public spending could be established for outlays on education and healthcare as a percentage of GDP.
Other aspects of the possible transformation may include greater self-reliance/protectionism as a way to shield labour from lower cost producers, as well as “industrial policy” to prop up competitiveness. Labour markets are likely to become more rigid, while in the post-pandemic setting labour conditions are likely to be notably transformed towards greater flexibility in working location and working-week duration. With countries such as UAE and New Zealand adopting the 4-day working week, many more countries are likely to follow their lead in the years to come.
Overall, the transformation of capitalism towards a more labour-oriented mode is underway. The ESG paradigm at the corporate level and the sizeable scale of stimuli that prioritized social outlays and household consumption during the pandemic crisis are suggestive of such a shift. The question is whether this is a systemic transformation or an aberration, a façade that is to camouflage lingering inequities and imbalances. As argued by John Kenneth Galbraith, “the manners [i.e. the façade] of capitalism improve. The morals may not.”
from our partner RIAC