The International Labor Organization (ILO) recently released its Global Wage Report 2012/13. Econ blogger Timothy Taylor, the “Conversable Economist,” (H/T Economist’s View) points to one of the report’s most disturbing findings, the fact that labor’s share of the GDP is declining significantly in nearly all countries throughout the world. Here’s an excerpt from the report:

The OECD has observed, for example, that over the period from 1990 to 2009 the share of labour compensation in national income declined in 26 out of 30 developed economies for which data were available, and calculated that the median labour share of national income across these countries fell considerably from 66.1 per cent to 61.7 per cent … Looking beyond the advanced economies, the ILO World of Work Report 2011 found that the decline in the labour income share was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America.

It wasn’t always this way. As Taylor notes, before the 1980s, labor’s share of national income fluctuated somewhat from year to year but tended to be stable overall. Also, during this period, we’ve seen large surges in productivity — and yet those productivity gains are not being shared by labor. This is an ominous sign for any society. One of my all-time favorite quotes is this one, from John Maynard Keynes: “Nothing corrupts society more than to disconnect effort and reward.”

Taylor makes a couple of helpful comments. One is that, “When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too.” So, yes, I agree with him when he says that blaming something American-specific like Democratic or Republican policies for this is a bit off the mark. Specific policies may either worsen or alleviate the trend, but they’re unlikely to be the root cause.

Also, definitely +1 on this:

The causes are still murky, but one possible answer can be pretty much ruled out. The declining labor share is not caused by a shift from labor-intensive to more capital-intensive industries–because the trend toward a lower labor share is happening across all industries.

I hear this explanation fairly regularly, as a reason for the decline of labor, the rise of inequality, etc. It’s even popular among some of my leftist comrades. But for the reason Taylor succinctly states, it doesn’t really make a whole lot of sense.

What might be the reason, then? Taylor mentions these possible explanations:

They include technological change, globalization, the rise of financial markets, altered labor market institutions, and a decline in the bargaining power of labor. But after all, technological changes in information and communication technology are part of what has fed globalization, as well as part of what led to a rise of the financial sector. Globalization is part of what has reduced the bargaining power of labor.The ILO report offers some evidence that the rise of the financial sector is a substantial part of the answer.

I believe that the answer to this complicated question is both “all of the above” and “something more.” Let me sketch a quick-and-dirty historical/political argument. The aftermath of the Great Depression resulted in a historic shift in the balance of between capital and labor. The social disruption, mass unemployment, and suffering of the Depression radicalized many workers, and caused them to organize and make demands. At the same time, capitalists, seeing the communist revolution that had taken place in the former Soviet Union, had the fear of God put into them. They made concessions to keep the peace with labor, because they feared losing everything if they didn’t. For them, the USSR was the writing on the wall.

An additional motivation was to show that it was possible to have a society that was fair and provided a good standard of living and decent social protections for workers, without being communist. The continuing existence of the Soviet Union acted as a prod to their conscience; certainly, many capitalist elites wanted to persuade the world (including developing countries where Marxist uprisings were afoot) that they were “better than that.”

Thus, you had the Great Compression, where wage inequality was kept in check, and the excesses of the previous era’s robber barons (and what a wonderful turn of phrase that was!) seemed a thing of the past. Paul Krugman and others have noted that it wasn’t market forces or laws against self-dealing or excessive executive compensation that reined in the corporations of yesteryear. It appears to have been “social norms.” Or, as I would describe it, a soundly based, and healthy, fear of working class power.

Gradually, though, that system began to unravel. The trauma of the Great Depression was forgotten. Global competition cut profit margins and the capital class realized they didn’t want to be so generous to their workers any more. More to the point, it dawned on them that they didn’t have to be. Thus, the neoliberal new world order was born — not only in the U.S., but throughout the world.

Beginning in the mid-1970s, there were cuts to social welfare programs in many countries, and there were also a number of important worldwide fights against labor unions, which labor usually lost. In the U.S., the corporate right poured enormous resources into political lobbying efforts and to propaganda shops that massaged public opinion. It worked! It’s taken the current years-long depression to finally dislodge some that neoliberal propaganda from a lot of folks’ skulls.

The fall of the Soviet Union was a key moment in all of this. When the Soviets fell, it really did seem as if, to quote Margaret Thatcher, “there is no alternative.” Capital no longer had anything to fret about. Non-socialist countries didn’t have to worry about workers getting any ideas. God knows I would never want to bring back the USSR, but I don’t think there’s any question that it was one of the things that helped keep capitalist excesses in other countries in check.

So, that’s my sloppy theory about why labor’s share of national income has been declining worldwide. I have no idea what would turn it around, other than an ever-deepening economic crisis that leads to organizing of that sort that greatly empowers labor, seriously threatens economic elites, and restores labor’s bargaining power. Until then, I’m afraid, things are likely to get worse before they get better.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee