In "advanced" economies, income inequality has grown more stark as a result of workers' declining power — a finding that both contradicts prior research and points to clear policy solutions, the researchers behind a new study argue.

Rising income inequality is not, as some economists say, an inevitable outcome of technological progress, but rather the result of policy decisions to weaken unions and dismantle social safety nets, the researchers found. In their Socio-Economic Review paper, published March 20, the authors looked at the percentage of gross domestic product represented by wage share in 14 high-income countries, including Australia, France, Germany, Japan, the U.K. and the U.S. 

A large majority of people receive most of their income from labor, so when the wage share of the GDP gets smaller, income is redistributed to people in the top 5% or less, who get more of their income from capital; the economy's productivity is increasing, but people's wages are not increasing at a commensurate rate.

Between 1997 and 2007, union density, a proxy for greater worker power, accounted for 23% of the decline of the wage share of GDP, according to the researchers' model. Offshoring to mostly low-wage countries, a proxy for undermining labor's bargaining power by taking advantage of cheapened labor in less developed countries, explained 44% of the decline in the wage share of GDP. 

In contrast with the technological change hypothesis, which posits that the lowest-wage workers would be the most affected by new technologies, this study found that medium-skill and medium-wage workers were most affected by technological change. They also found that higher minimum wages raised wage share for workers of all skill levels in both manufacturing and services. 

"The pure technological change story talks about labor being substituted by capital — workers are being substituted, say, for robots," lead author Alexander Guschanski told The Academic Times. Theoretically, the easiest people to "substitute with capital" are lower-skilled workers, but that didn't show up in this analysis. Instead, Guschanski found that the workers' wages weren't growing as fast as productivity because their bargaining power had been undermined. The University of Greenwich lecturer said that the hit for low-skilled workers, who have seen the strongest decline in the wage share, "is mainly driven by a decline in union density."

Guschanski and his co-author, Özlem Onaran, an economics professor at the University of Greenwich and the director of the Greenwich Political Economy Research Centre, found that a 1-percentage-point increase in offshoring from developed nations to lower-income countries reduced labor's wage share by nearly 2 percentage points. When unions became 25 percentage points more dense, labor's wage share went up by 2 percentage points. Overall, they broke up the analysis into several periods from 1970 to 2014, and the latest period, covering 2008 to 2014, did not confirm the overall results; however, those years were rocked by the Great Recession, and, the researchers wrote, unions likely accepted lower wages to save jobs during a crisis.

Guschanski and Onaran also examined the bargaining regimes in different countries. In countries with unions that mostly negotiated at the firm-level or sometimes the sector-level — Australia, France, the U.K. and the U.S. — a more robust social safety net was more important than union density, seemingly because it increased labor's bargaining power by giving them a stronger backup plan. In contrast, union density was more important in countries with unions that bargained on the national level. 

Additionally, an increase in the share of women in the labor force also drove the wage share down, highlighting the need for better equal-pay protections.

Previous research into the declining wage share did not use the industry-level union density data the economists used in this study. Prior work also failed to account for the difference between offshoring from a high-income country to another high-income country and offshoring from a high-income country to a low-income country, which has markedly different implications for all workers involved in each scenario.

When Guschanski reported the preliminary findings for this study at conferences three years ago — namely, telling fellow economists that he wasn't finding much evidence that technological change was responsible for wage-share decline, but that union density appeared to have a strong effect — "I received a lot of backlash," he said. 

"For me, it's interesting," Guschanski added. "As always with social science research, there are, of course, a couple of question marks about the data, a couple of concerns. But people seem to be more wary of the concerns when it comes to union density data or social relations data than they are with concerns to technological data, which has a lot of other problems and doubts."

Guschanski noted, however, that despite the doubts, he and his co-author "used the same variables, the same approaches to measure capital and technological change that are used in other papers that were published on this topic." Moreover, he said, "Our argument is that by controlling for the state of technology in the production process — by controlling for capital intensity and total factor productivity — when we estimate the effect of offshoring, what we capture is not changes in the production process, but the effect of offshoring on the bargaining power of labor."

The policy response, Guschanski and Onaran argue, is clear: To tackle income inequality, politicians and workers should strengthen unions, improve and enforce equal pay, increase minimum wages and build stronger social safety nets and international labor standards.

In the U.S., steps are already being taken in that direction. In March, the union-backed PRO Act passed the House of Representatives, though it may face a challenge in the Senate. 

"Technological change has always been there, and it is particularly important because it determines what we can produce with a certain amount of resources at our disposal," Guschanski said. "But how this is distributed is an inherently political question."

The study, "The decline in the wage share: falling bargaining power of labour or technological progress? Industry-level evidence from the OECD," published March 20 in Socio-Economic Review, was authored by Alexander Guschanski and Özlem Onaran, University of Greenwich.