There are 2 big reasons worker pay isn't going up

  • A decline in union participation helps explain stagnant wages for US workers.
  • Research points to automation as another factor in labor's falling share of national income.
  • The same trend is taking place across the world.

Federal Reserve Chair Janet Yellen and other top economists say productivity is the key to long-run wage growth for American workers. That would be true — if only the fruits of economic expansion were actually trickling to average incomes.

"If the labor market continues to improve, we will see some pickup in wage growth, but we have at the moment low productivity growth," Yellen told Congress in her last official testimony of her term as Fed chair, which ends early next year. "That wage growth would be greater over time if productivity growth picks up."

Two new studies indicate the process may not be so simple. That's because for decades the benefits of a more productive economy have flowed increasingly to corporations at the expense of workers.

It's happening for a bunch of reasons, research shows. The two main ones: a sharp decline in worker unionization and the automation of certain types of work that has further eroded the bargaining power of labor.

A new report from the International Monetary Fund zeroes in on one particular trend: "The US labor share of income has been on a secular downward trajectory since the beginning of the new millennium."

"Across both state and industry, we show the decline in the labor share is broad-based but the extent of the fall varies greatly," IMF economists Yasser Abdih and Stephan Danninger write. "In addition to changes in labor institutions, technological change and different forms of trade integration lowered the labor share."

The IMF research finds that the share of US national income going to workers in the form of wages and benefits has declined by 3.5 percentage points since 2000. Before that period "while the labor share displayed some ups and downs, there was no notably long-term trend."

Trade and globalization also played a role, the paper suggests, because the sectors most deeply affected were also those most exposed to international trade, such as information technology, manufacturing, transportation, mining, and agriculture.

The findings come with a rather stern warning about social and growth effects from the decline in labor's share of the economic pie, which has become a major political issue in the US and other Western nations.

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