Study shows why workers are getting a smaller slice of the pie

The portion of national income that goes into workers’ pockets has been declining in the U.S. and many industrialized countries for several decades, but the exact reasons for this have been murky. Research has typically focused on one potential factor, and one country, at a time, providing no definitive explanation.

“The reason why America is so rich and yet some people are unhappy is because of this very inequitable distribution of income,” says Professor Ann Harrison, former dean of Berkeley Haas. “That’s why we want to try to understand why workers are getting a smaller share of the pie.”

A new study from Harrison is the first to compare the impact of four key factors on what economists refer to as “labor share”—defined as the portion of revenue going to workers after accounting for the costs of production—and to do so across six countries. “Think of labor share as how much workers are getting compared to company shareholders—the owners of capital,” Harrison says.

She found that, in industrialized countries, technological change is the biggest factor behind workers’ declining slice of the revenue companies generate. Globalization is the second biggest factor; growing market concentration also matters in most places, and a rise in intellectual property and other intangible assets plays a smaller role.

The cost of technological innovation

Harrison analyzed millions of records from public and private companies in Sweden, France, Hungary, South Korea, and Germany included in Orbis, a global database. The data, which covered the period from 1995 through 2019, included measures of value added, compensation to workers, and profits that are used to calculate measures of labor share.

Using statistical analyses, Harrison concluded that technological innovation has had an outsized impact on what workers take home: When the share of revenues spent on research and development goes up by 1 percentage point, labor share falls by up to 1.3 percentage points. This likely has to do with a blow to workers’ bargaining power, Harrison notes: “You can suggest replacing people with machines to keep them from demanding a greater share of the pie.”

Globalization has also had a significant effect. When the share of sales coming from exports jumps 1 percentage point, labor share declines by 0.3 percentage points, Harrison found. Again, the culprit is less leverage on the part of workers. “In a highly globalized world, firms can threaten to relocate, so they can retain more surplus for capital owners,” she says.

At the same time, technological change and globalization boosted employment in the countries in the sample, Harrison found. That’s because both technological innovation and expanded markets increase demand for products and services and thus demand for the workers who provide them. Combined with declining labor share due to employees’ lower bargaining power, “this is not good for wages,” Harrison says. “People need to think about that and what to do about it.”

Higher market concentration—as measured by the share of revenue going to the top four or top 20 largest firms in a sector—lowers employment everywhere, Harrison found. It’s also linked to falling labor share in every country in the sample but Sweden, where unions are widespread and powerful, the research showed.

“When firms have market power, they tend to restrict supply, push up prices and not employ as many people,” Harrison says. “If workers have no bargaining power, all that surplus goes to the owners. But if workers have a lot of bargaining power, they can shift that labor share to themselves.”

The growth of intangible assets—which includes patents, trademarks, copyrights, and more—also drives reductions in labor share but has a smaller effect than the other three factors. Since many intangible assets are related to research and development, the effect could be due to the same dynamics as technological change, Harrison says.

A different story in some countries

To examine whether these factors operate similarly across countries, Harrison included countries with different income levels in her sample. She found that higher globalization was linked to higher labor share in both Hungary, where incomes are relatively lower—and firms have fewer options to save costs by relocating—and South Korea, a high-income country. However, in Sweden, another high-income country, the effect was negative.

Harrison says her theoretical framework, where workers and firms bargain over dividing up the pie, helps explain the results. In a country like Sweden, there are many locations that firms could move to which would lower their costs, so workers have less leverage.

Globalization benefitted Chinese workers

In separate work on China, based on data from 1998 through 2007, Harrison also found that globalization led not only to more Chinese employment, but also to workers getting a bigger slice of revenue. The reason for that once again goes back to bargaining power, Harrison argues. “If you were in China during this period and a worker asked you for more money, and you said, ‘I’m going to move somewhere else,’ there aren’t a lot of places for you to move,” she says. “You already had the most efficient, cheapest workforce in the world. So there was a lot more potential for labor to increase its share.”

Combating inequality

Addressing falling labor share is key to combating rising inequality and ensuring that economic gains benefit everyone, Harrison says.

Tariffs are not the solution, she argues, because they put many people out of work. “They restrict global expansion, so markets are smaller and there are fewer opportunities, even if people who are employed get higher wages,” she says.

Instead, she advocates for policies that increase market competition, such as breaking up monopolies, and that boost the bargaining power of workers through unionization, improvements in education, or other strategies.

While technological innovation and globalization can benefit economies, she notes that leaders also need to consider their harms. “They’re not always good for the labor force, and we need to create opportunities to counter these forces,” she says.