Could Collective Bargaining Reverse Labour's Falling Income Share and the Increasing Compensation-Productivity Gap?

When considering the growth in inequality of income, it is necessary to distinguish changes in factor-income, between capital and labour, from changes within factors, i.e. greater inequality between workers. While recognising that the two are connected, this paper focuses upon changes in the labour-capital share over recent decades. It was an accepted stylised fact of post-war economies that the labour-capital share is broadly constant over time (Kaldor 1957). However, it is clear that in recent times this relationship has broken down. Across a range of developed and developing countries, the OECD reports a falling labour-share over periods of the last two decades, and much longer periods for some countries and sectors of economies. The falling labour-share is a component part of a broader ‘compensation-productivity’ gap – the difference in growth between labour productivity and real hourly wages (Fleck et al. 2011). At an economy-wide level a constant labour-capital share is consistent with real compensation increasing at the same rate as productivity. This raises the question of whether decline in the coverage of collective bargaining, which historically sought to link wage increases to labour productivity increases in countries including the UK, is a major explanatory factor in the breaking of the relationship between compensation and productivity at an economy-wide level. While collective bargaining has clear benefits, including greater transparency between capital and labour, we argue that wage bargains, which are necessarily nominal, cannot be linked to real productivity increases in order to achieve the real productivity – real wage relationship that would stabilise the capital-labour share of an economy. This was implicitly recognised by industrial relations scholars of the 1960s and 1970s who, when explaining productivity bargaining at a disaggregated level, suggested that a separate fund be created to smooth out the effect of price changes in outputs and inputs unrelated to direct changes in productivity (Burchill 1970). While we are sceptical of the potential effectiveness of disaggregated collective bargaining based on productivity increases to increase the labour-share, we do see potential for collective bargaining at a firm level over a more direct measure of economic surplus, for example increase in value-added. During times of weaker firm performance, where wages are sticky downwards, this would place the pressure in the first instance upon profits, but this is the risk function by which capital justifies its return in mainstream theories of finance.