Report Gives New Insight in the Decline of the Middle Class

Globally the share of income going to labor is decreasing along with the traditional middle class.

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Eileen Appelbaum, Senior Economist, Center for Economic and Policy Research

The recently released 2012 Organisation for Economic Co-operation and Development Employment Outlook provides new insights into the decline of the middle class. The report documents the global shift from labor income to profits. Across the Organisation for Economic Co-operation and Development, known as OECD, the share of income going to wages, salaries, and benefits—labor's share—declined over the last 20 years. The median labor share in OECD countries fell from 66.1 percent to 61.7 percent of national income. However, the decline in labor compensation was not equally shared by all employees; the wage share of top income earners increased while low-paid workers were hardest hit. On average, the wage share of the top 1 percent of income earners increased by 20 percent over the past two decades.

In the United States, where labor's share began its decline in the 1980s, it fell a further 2.5 percentage points over the past 20 years. Excluding top earners' income, the decline in the adjusted labor share was 4.5 percentage points.

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The decline in labor's share of national income did not result from a shift away from labor intensive industries to industries that employ a low share of labor. The OECD's analysis found overwhelmingly that it is within-industry declines in labor's share of industry value added that explains the fall in labor's share. On average, the OECD found, real wage growth within industries did not keep pace with productivity growth.

Examining the causes of the decline in labor's share, the OECD found that labor-saving technical change across most industries was associated with greater investment in capital and higher productivity growth as machines replaced workers in some jobs. The OECD found a strong association between technical change and the decline in labor's share. It is important not to be hasty and jump to the conclusion that technological unemployment is to blame for the decline in labor's share. In fact, the OECD did not find fewer jobs overall for less-educated workers.

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Rather, what they found is not a decline in low-skill jobs, but a decline in jobs that pay middle-class wages. The share of the high-skilled in occupations such as manager or IT engineer increased as did jobs at the bottom of the wage distribution, typically low-paid precarious jobs. Unfortunately, this increase in demand and employment of workers in low-paying occupations did not improve the earnings of these workers. Increasingly, better-educated workers who in the past would have found middle-class jobs ended up low-paid employment. The OECD found that educational requirements increased quickly in low-pay occupations and that "workers in these jobs tend to be overqualified" (p. 124). A recent report from the Center for Economic and Policy Research found this to be true in the United States, where 43 percent of low-wage workers have some college or a college degree, 27 percent have a high school degree, and only 20 percent did not graduate from high school.

What, then, explains the failure of real wages to grow in line with productivity growth, and for increased educational attainment to translate into middle-class earnings? The evidence points to the negative effects of deregulation of some industries and increased globalization on workers' bargaining power.

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Deregulation of industries such as energy, transportation, and communication in which union density had traditionally been high opened these industries to new enterprises staffed by non-union workers. Increasing globalization—the delocalization of some parts of the supply chain as well as import competition from low-wage countries for blue-collar workers (but, notably, not for doctors, lawyers, and other high-paid workers) has led to the loss of well-paid unionized jobs. Both of these developments have led to a reduction in workers' bargaining power vis a vis employers and have weakened unions, leaving workers to fend for themselves and employers to fix wages individually. The result according to the OECD has been to "decrease the bargaining power of workers, particularly those who are low-skilled, and thus their ability to appropriate their share [of productivity gains]."

The unequal distribution of labor income—with nearly all the gains in wages going to the top 1 percent while earnings stagnated or declined for the 99 percent—has gone hand-in-hand with the decrease in the share of national income going to labor and the shift from labor income to profits. Absent a countervailing force that enables workers to share fairly in the economy's productivity gains, the decline in labor's share appears likely to continue.

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