Labor Income Share in Asia

This paper analyzes the evolution of the labor share of income in Asia, a region where countries have experienced steep declines and increases as well as stable labor income shares in the quarter-century since 1990. An innovation of this study is to expand the standard drivers of labor shares—technological advance, trade, institutions, and policies—by considering whether the exposure to routine jobs has also played a role in the evolution of the labor share of income. The more exposed a country is to routinization, the greater is the probability that ICT capital substitutes mid-skilled jobs, lowering the overall wage share of workers. Using a new dataset on the exposure to routinization, the study finds that it is an important determinant of the evolution of labor shares in developed Asian economies, where the initial exposure was high, but not in developing Asian economies where the share of routine jobs was small.

There are two fundamental reasons why factor shares have traditionally been overlooked in the economic literature. First, because of their nature, factor shares are conceptually difficult to define and measure. Second, they have for a long time been perceived as constant across time and space. In this study, we provide an evaluation of five different methodologies of estimation commonly used in the labor share literature and propose a new measurement. We then compile a global dataset of the labor income share across 151 economies—both developing and developed—for all or part of the period 1970–2015. Results show that our suggested indicator is correlated to the other five measures but it also retains unique information. Contrary to the traditional assumption of stable factor shares, we document the existence of considerable heterogeneity across economies and variability over time. Specifically, there has been a general decline in the labor share around the world, in particular from the mid-1980s onwards.

We investigate the causes of the decline in the labor share, exploring the effect of technology vis-à-vis the role of market regulations, namely employment protection legislation, product market regulation, and intellectual property rights (IPR) protection. Our results show that, in the long run, productivity upgrades and information and communication technology capital diffusion are major sources of the decline in the labor share. IPR protection is the only dimension of the institutional setting that affects (positively) the share of industry income accruing to labor. Our results also show that hysteresis characterizes the dynamics of the labor share in all countries. This further corroborates the idea that institutional differences are not the main source of variation in labor share movements, as the negative trend is common to countries with different regulatory settings.

This paper provides novel empirical evidence on the role of trade and structural transformation as potential drivers of the labor income share. Using cross-country data, both at the national and sectoral level, we find that trade openness is negatively correlated with the labor income share. The findings are robust across national and disaggregated levels, and across different model specifications. However, the relationship between the process of structural transformation and labor income share is at best mixed. We also find weak evidence that skill-biased structural transformation is likely to be positively correlated with the share of labor income predominantly in the services sectors.

Summary statistics on the labor share of income show that between-country variation is much greater than within-country variation: functional income distribution is determined by factors which change substantially across countries but are persistent over time. This article attempts to shed some light on the long-run and political economy determinants of the labor income share. We revisit and extend previous empirical research on democratic political institutions and the labor share using a dataset of 112 countries over the period 1970–2015. Our empirical analysis shows that democracy allows workers to appropriate a higher share of national income. The evidence is robust to different indices of democracy and different periods of time, and after performing instrumental variable estimation. These results are particularly relevant today, in light of the recent global decline in the labor income share and current crisis of democracy.

This paper explores whether trade can explain a part of the sharp decline in the labor share of Indian formal industries from around 30% in 1980 to less than 10% in 2014. Decline in strikes and lockouts, reduced labor time lost from disputes per factory and increased use of contract workers in all major states in India are signs of reduced bargaining power. In order to estimate the influence of trade, the mark-up and bargaining power affecting the labor share and resultant productivity is derived. A semi-parametric approach is applied on a 3-digit level of industrial data over major states during 1998–2014 to regress Solow residual (the proxy for productivity) on trade share along with its interaction terms capturing market imperfections. The results confirm that trade, by dampening the bargaining power of labor, reduces labor share and hence raises productivity. It is argued that the joint effects of market size and competition arising out of trade cannot dominate the adverse effect of specialization in the presence of unions. The degree of specialization or comparative advantage that appears due to the increased market share of the most productive firms, who require fewer workers, thereby reducing the demand for workers with the trade. The drop in demand weakens bargaining power and shifts away distributive share from workers. But the competitive policy encouraging entry can negate such adverse effects of trade, to a large extent.

Labor income shares have been falling in many advanced and emerging economies within the last few decades, partly as a result of a combination of impacts from technology and increased global integration. This in turn is associated with the relatively slow growth of wages, especially for medium-skilled workers, and the worsening of the income inequality in these economies. In contrast, Malaysia’s labor income share has been increasing since 2005, together with a reduction in income inequality. We investigate this development by exploring the differences in trends of the labor income shares across different economic sectors and firm sizes and identifying factors that could explain the increase in the labor income share in Malaysia. We find that the increase is mainly due to the growing importance of more traditional service subsectors and SMEs in the economy. This in turn is associated with greater reliance on low-skilled foreign workers during this period. These findings have important policy implications for Malaysia, including the potential trade-off between driving labor productivity and fostering inclusiveness. This contrarian trend offers insights that could be relevant to the experiences of, and policy choices available to, other emerging economies facing deindustrialization.

We investigate the long-term drivers of the labor share in Japan using data from the Japanese Industrial Productivity database from 1970 to 2012. The descriptive and econometric results indicate that the decline in the labor share observed in Japan during the period of analysis was highly concentrated in the low-knowledge-intensity sectors, the employment share of which has increased remarkably. These sectors also experienced a strong increase in non-regular workers, who constitute a secondary segment of the labor market in Japan, characterized by low wages and very limited union coverage. The low level of protection of this group of workers and the increase in market power concentration have probably contributed to reducing the bargaining power of labor vis-à-vis employers and, consequently, the labor share.

The labor share in Japan has been declining significantly over the last three decades, accompanied by persistent stagnation and an unprecedented increase in economic inequalities. Since these dynamics are likely to be interrelated, understanding the drivers of the labor share might contribute significantly to the Japanese economic and policy debate. Surprisingly, the existing literature on the labor share in Japan is rather limited and confined to country or industry studies. We first attempt to analyze the drivers of the labor share in Japan at the firm level. To this aim, we employ a panel of manufacturing firms from the Basic Survey of Japanese Business Structure and Activities, spanning from 2001 to 2012. By means of panel data estimators, we show how, besides technological variables, firms’ labor share depends significantly on the share of regular workers, on the importance of firms’ international engagement, and on various institutional settings of the product and labor markets.