HR - Falling share of wages

The International Labour Organisation’s caution on the consequences of dramatic decreases in the share of wages in Gross Domestic Product, despite increases in productivity, is timely given the current impact of the global financial crisis and rising prices of food. Corrective measures are imperative in view of the projected loss of millions of jobs over the short term. According to the latest report of the ILO’s International Institute of Labour Studies, the proportion of real wages to total incomes dropped in many advanced and developing countries between 1990 and 2006, with the Latin America and the Caribbean recording the sharpest decline in the shortest periods. While China and, to a lesser extent, South Africa are exceptions to this general trend, labour’s share of incomes has remained constant in the Middle East, Central and Eastern Europe, and the Russian Federation. The widening income disparities, notwithstanding gains in productivity and a 30 per cent rise in global employment since 1990, underscores the failure of states to promote decent jobs, incorporating provisions for strong social and welfare protection of the population in the working age and mechanisms for collective bargaining. Whereas skills-based technological changes, and globalisation and reforms of the labour market are among the factors identified as accounting for the current inequalities in incomes, there is increasing consensus that the globalisation of financial markets has further accentuated this trend.

It was expected that exporting countries would ensure more efficient investments and improve macroeconomic policy, and poorer countries would benefit from access to capital flows in terms of economic growth, generation of employment, and alleviating absolute poverty. But experience has been mixed. Instructive is the empirical evidence from the ILO that excessive executive compensation does not automatically guarantee profits of big corporations, even though inequalities in income are justified by the need to reward innovation, effort, and initiative. Although the diminishing share of wages is statistically associated with decline in the density of unions only in a few countries, the critical role of collective bargaining institutions in influencing redistributive policies cannot be overstated. The latter is borne out by the experience of many European countries where well-coordinated agreements with enterprises and a general respect for trade union rights underpin the success of welfare states. This is a model to emulate for the emerging economies of Asia to sustain the phenomenal economic growth they have registered in recent years.