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The Global Upward Trend in Profit Share

by UnEstranAvecVueSurMer Tue Jan 29th, 2008 at 09:12:57 PM EST

The Global Upward Trend in the Profit Share is the name of a working paper from the Bank of International Settlements (BIS). The BIS describes itself as "an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks." It also serves as a research center for policy and publishes its findings on its website. Among those we find this slightly awkward title pointing to the increase of the share profit in GDP. I do not know enough to analyse the fact itself, or its relevance to current problems and the Anglo Disease. But I trust the ET stat squad will know what to do.

A few observations to get started though.

[1] The data shows that the trend started in the mid/late 70's. This reminds me of the period were US wages started to stagnate: surely the two aren't unrelated.

[2] There doesn't seem to be an obvious difference between the Anglo-Saxon and European economies in this respect. This data can almost certainly be linked to a number of issues currently being debated in 'continental' Europe. The current hype on 'pouvoir d'achat' in France (purchasing power) could be seen as an understatement for the loss in revenue described here. In France income share went down 9.3% since 1960.

[3] For the welfare state, income matters because it is where most money is punctured to support social policies (retirement benefits, universal healthcare). As the share of income goes down, a number a policies which were previously affordable now seem to be remnants of a socialist world. One common critic of the welfare state is that it is inherently bankrupt: it would be interesting to see how much of the current  'social deficits' we run could be paid had the income share remained constant.

[4] On the same note the UK is the country whose income share has not significantly increased in the past 30 years. It's also the only country who created so many public sector jobs...

Here is  the conclusion of the article, so that you can get the gist of it.

In this paper, we have presented both graphical and econometric evidence of one particular stylised fact describing factor income shares in industrialised countries - an upward trend in the profit share that started in the mid-1980s, or equivalently a downward trend in the wage share. This trend is clearly apparent even after controlling for a number of factors that might previously have been thought to have been its cause, including the business cycle, labour market deregulation, and the entry of China and other emerging market economies into the global trading system.

The combination of this trend's timing and its cross-country pattern is consistent with a technological cause: faster innovation increasing the rate of obsolescence in capital goods and the ex ante rate of churn in the labour market. This greater churn strengthens firms' bargaining positions and allows them to capture a larger share of factor income. The increase is therefore in essence a reallocation of economic rents - a new equilibrium, but not necessarily an optimum. It could easily be above or below that necessary to offset the faster rate of economic depreciation, while maintaining a constant level of the effective capital- labour ratio.

Ideally, we would want to show that this trend can be explained by some measure of the use of faster-depreciating technologies in capital goods, or the depreciation rates themselves. Unfortunately all the standard measures in this field, such as those from the OECD, relate to information technology and communications goods specifically. Thus they do not adequately capture the fact that IT components are increasingly being embedded in a broader class of
capital goods that would not be thought of as IT products, and thereby increasing their rate of obsolescence as well. Nonetheless, the common timing of the trend, its cross-country pattern, and its correlation with other stylised facts about the labour market are all consistent with the Hornstein et al model - particularly as it relates to product market regulation - being the most likely explanation of the trend, out of all the possibilities considered here. The cross-country pattern in the magnitudes of these trends has not been well explained in the
literature before.

This technological explanation implies that the recent upswing is not part of a cycle. It is not inherently likely to reverse, nor was itself the necessary reversal of an earlier - perhaps unsustainable - shift up in the labour share brought about by a change in workers' bargaining power. Indeed, if our preferred explanation is correct, then the observed shifts in factor shares were simply a redistribution of existing economic rents, which could continue for some time before stabilising, only reversing if the underlying drivers do.

You will find graphs (which I can't add for some reason) of individual countries profit share increases  since 1960 on page 2, and a general trend graph on page 3. Here is the whole thing.


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Brought to you from Le Monde Diplomatique (this) through the comfort of my room (where i'm supposed to study).

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Tue Jan 29th, 2008 at 09:18:44 PM EST
Hopefully I'll have more time to comment later on, but for now I want to pick out this sentence:

The combination of this trend's timing and its cross-country pattern is consistent with a technological cause: faster innovation increasing the rate of obsolescence in capital goods and the ex ante rate of churn in the labour market.

I'm pretty cynical about this meme. As Krugman amongst others have noted, the combination of timing and cross-country pattern can also be related to various political developments and various geo-political issues too.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 30th, 2008 at 04:03:11 AM EST
The authors note that their explanation is more consistent than any other that has been put forward... but there is enough discrepancy between the countries to ask whether it's coincidental. will be back later... that is, tomorrow morning in good ol' europe.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Jan 30th, 2008 at 11:11:41 AM EST
[ Parent ]
Here is an in-depth study about the phenomenon in the European Union, but with data about the United States and Japan (and with interesting charts):  The Labour Income Share in the European Union

The evolution of the labour income share involves issues of equity, economic efficiency as well as macroeconomic stability as it has, for example, an impact on personal income distribution and social cohesion, the direction of the adjustment in wages and employment, and the composition of aggregate demand.

This chapter illustrates how the labour income share in the EU started to decline around the second half of the 1970s and fell towards levels that are below those that were attained in the 1960s. In addition, the chapter also shows that the share of the lowskilled workers in the total wage bill fell gradually while the share of the high-skilled workers rose steadily.

I didn't have time to read it all, but I want to highlight one thing: not only the share of labour in the GDP has been declining, but within the share of labour, inequalities are rising.

Secondly, there was also an important change in the composition of the wage bill, with the share of the low-skilled showing a marked decline and the share of the high-skilled workers displaying a steady rise.

We must not forget that the share of labour includes the wages of the top management. As Picketty and Saenz have shown, salaries contribute significantly to the top 1% income.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 30th, 2008 at 05:05:35 AM EST



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 30th, 2008 at 07:02:48 AM EST
But wouldn't have all of this made a good argument in 'France is not is trouble and the last thing it need is reform'? After all, the main sarkozy meme is 'i will allow you to earn more'.

Maybe the link between overall share of income and average income has to be made more explicit for the argument to work (so that le rapport d'inegalite is consistent with observed income share of gdp).

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Jan 30th, 2008 at 11:17:03 AM EST
[ Parent ]


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