Tuesday, June 25, 2013

Will Rising Interest Rates Increase Labor's Share of Income?

This article makes two fundamental points:  The first point is that labor's share of income is decreasing in all OECD countries.  Therefore, the problem is not unique to institutional changes in the US.  Secondly, a large percent of decline in labor's share of income is explained by an increase in automation.  Labor is not getting its share of rising productivity as it has in the past.  It follows from this analysis that investments in automation, which are stimulated by low interest rates and tax policy, should be reduced in order to increase labor's share of income.  That conclusion is at odds with economic thinking which assumes that capital investment is good for everyone and that government policies should encourage capital investment.

While automation may be responsible for a portion of the loss in labor's share of income,  and the US is not unique in this respect, we should not leap to the conclusion that institutional changes are not part of the problem.  Many of the institutional changes that have occurred in the US have been taking place in other developed countries.  Multinational corporations and global finance have unleashed forces that can be observed everywhere.  Labor's share of income has been affected by globalization in ways that are not fully understood.  Whats happening in the US is happening in all of the OECD nations.  Some countries have adjusted differently than others, but the phenomenon is global.  There is nothing exceptional about the US because the global economy has been Americanized.

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