Why workers benefit so little from economic growth

Although there is no economic or political law according to which workers should equally and consistently share the benefits of economic growth, the share of labor income in GDP has steadily declined since the 1960s. The share of labor income is at its lowest level since the Second World War, while income inequality continues to grow.

Just look at the components of Canadian GDP. GDP is, in a way, a paycheck for Canada that is broken down into two parts. One part is “paid” to workers in the form of income, the other part is paid to companies (and their shareholders) in the form of capital. Since the 1970s, the share of GDP devoted to “labor income” has declined steadily, from 59.9% in 1976 to 53.3% in 2015.

The same effect is visible when looking at real wage growth-it has almost stagnated for all except for the highest incomes. In short, Canadians’ incomes grow less quickly than the companies that hire them, giving the impression that growth is reserved for businesses and the wealthy.

However, inequalities are not the cause, they are a symptom. Many recent debates on the causes of inequality highlight a growing concentration among producers of monopoly prices in seller’s markets; or automation and mechanization that displace workers. Yet, the cause of inequality could be elsewhere.

In fact, recent research shows another side of the coin: consolidation among employers could also make a decisive contribution to slowing wage growth and increasing income inequality.

If there are only two employers in the labor market, for example, they do not have to be as competitive looking for employees.

This reduced competition for workers gives these companies “monopsony” powers in the labor market.

In such a market, workers are more likely to “accept” the working conditions offered by employers, and these companies do not have to worry about losing their workers to competing employers.

This lack of competition in the job market allows companies to pay a lower wage than would prevail in a competitive market. It also gives rise to income inequalities between workers – favoring higher wages for those with bargaining power (eg those who are more educated or those who are more mobile).

It is interesting to note that the best way to “repair” these inefficiencies related to monopsony power in the labor market is simply to raise the minimum wage.

In the case where the number of potential employers is limited – or too concentrated – minimum wage increases do not detract from employment (a criticism often made by those who oppose it).

These increases simply require employers to pay more for their workers. Indeed, recent studies show that minimum wage increases have not had a negative impact.

Of course, the ultimate impact of minimum wage legislation is an open question, but data to date shows that these increases do not torment employment. Perhaps raising the minimum wage is an effective way of ensuring that workers get a better and more equitable share of the economic benefits of their work, while fighting against rising inequality.

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About the Author: Anna Galvez

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