Labour share of income: (Part 8 – Wage regulation and information disruption)
Phuah Eng Chye (14 July 2018)
The structured approach to labour organisation built around the industrial workplace is unravelling. Landscape changes are wrecking the old arrangements for work and income. The ideals of a career relationship and income progress over a lifetime is fading and it is being supplanted by the concept of work and wages as a transaction.
Historically, labour regulation governing employment and wages arose from the desire to protect workers from the debasing effects of unregulated labour markets during the industrial era. It was then argued labour should be viewed as a social relation and should not be treated like a mere commodity. Government policies were thus strongly influenced by the notion that wages and working conditions should meet acceptable living standards and that bargaining with employers should be a formalised process.
Wages were the fulcrum for bargaining between the trade unions and firms. Peter F. Drucker pointed out “conflicts over wage rates was at the core of most industrial disputes, and the stated reasons for strikes.” He noted “the basic problem is a conflict between the enterprise’s view of wage as cost, and the employees’ view of wage as income. The real issue is not, properly speaking, is not an economic one but one over the nature and function of wage: Shall the need of the enterprise or the need of the employee be the basis for determining the function of wage? Is wage to be considered primarily a current cost to be incurred in the payment of a commodity consumed in the productive process? Or is it primarily a future cost of conserving and increasing the human resources of production.”
Policy attitudes changed as economies made a transition from manufacturing to services. Developed countries became concerned by how rising wages were causing a loss of domestic competitiveness and jobs. The change in attitudes is reflected in the changing views on pay and productivity. In the early 20th century, advocates of wage regulation argued pay should not be linked to productivity because productivity levels were uneven across industries and firms. Tying wages to output would mean that people doing the same work in different firms and industries would receive different pay and this would result in unequitable outcomes.
From 1980 onwards, policy rhetoric emphasised competitiveness. Governments stood up to the trade unions and diluted labour protections to provide greater latitude for businesses to achieve labour cost savings. It was exhorted that wages should only be increased on the back of productivity gains. But the end result was that productivity gains did not flow into wages; causing the labour share of income to decline.
In particular, the decline in labour income share was blamed on the influence of agency theory and the shareholder value philosophy. During the 1960s-70s, the top management and well-paid tenured employees of many large corporations appeared comfortably entrenched. But it was also seen as a symptom of management complacency. There were several high-profile corporate failures, particularly the flagship and state-owned corporations, which sometimes prompted a government bail- out. It was argued these firms underperformed or made poor decisions because the interests of management were not aligned to that of their shareholders.
The growing dominance of institutional investors swung the pendulum further in favour of market discipline, maximising shareholder value and institutionalising corporate governance. Complacent firms found themselves a takeover target while remuneration shifted from seniority-based systems towards performance-linked assessments with rewards heavily skewed in favour of top performers. Profits replace equitability as the guiding principle. Market discipline worked as it should, warts and all.
But the transition involved more than just a change in government and corporate philosophy. It was also the outcome from a disrupted landscape. The emergence of new competitive dynamics marked the launch of a full-scale attack on labour regulation organised around the stable and hierarchical structures and the strict demarcation of duties of the large industrial enterprise. The “platform-based” companies were able to achieve dominance in a remarkably short period of time.
It is too early though to conclude the network-based dominance are replicas of the monopolies of the industrial conglomerates. Jean Tirole notes platform strategies such as the inclination to swallow up future competitors, the bundling of services, the offer of best price guarantees and data ownership affected the contestability of markets. “Platforms behave very differently from traditional firms. They tend to be much more protective of consumer interests…simply because they have a relationship with the consumers and can charge more to them (or attract more of them and cash in on advertising) if they enjoy a higher consumer surplus. That’s why they allow competition among applications on a platform, that’s why they introduce rating systems, that’s why they select out nuisance users (a merchant who wants to be on the platform usually has to satisfy various requirements that are protective of consumers)…I’m not saying the platform model is always a better model, but it has been growing for good reason as it’s more protective of consumer interest. Incidentally, today the seven largest market caps in the world are two-sided platforms.”
He points out in any case, platforms are difficult to regulate as “antitrust can be slow and digital industries are moving very fast; if the authority decides too late, the entrant may already have folded. Another issue is territoriality and possible disagreements among authorities; a national competition authority may create a problem for the incumbent because its decision may force that firm to reconfigure its products worldwide…We need to invent rules that are not too information intensive. Again, regulators don’t always have the required information, so they need to have rules that are robust, that are going to work regardless of the circumstances…authorities cannot afford to spend five or 10 years deciding, right? Besides, products that are complements today may become substitutes tomorrow, or the opposite. Because the usage changes, the competitive pattern changes. The job of antitrust authorities is extremely difficult in the end.”
Hence, in my view, the most crucial force unravelling traditional work and wage arrangements is information disruption. A traditional wage relationship is bundled and provides employees with long-term certainty on career, income and benefits. Wage regulation comes under duress as the boundaries defining employment are fissured by part-time and contingent work; by multiple roles and many-to-many relationships; and by blurring distinctions between work and home, and production and consumption. In an information paradigm, work is a modular and unbundled transaction priced on a real-time basis. Price regulation is always the biggest victim in a disrupted landscape.
In this landscape, not only are the jobs and income of individuals uncertain, the positions of management and the existence of firms are equally unsafe. Firms therefore want the operational flexibility to cope in this high-pressure environment. It Leaning heavily on firms to extract greater wage concessions may backfire because the majority of firms have little room to be complacent on labour costs. In this regard, the debate on some traditional remedies such as minimum wages may seem irrelevant. For example, if retail stores are closing down due to competition from online vendors, then higher minimum wages are unlikely to matter, one way or the other.
To summarise the argument, while firms can control their wage costs, they are price takers and generally follow the trend. Only government interventions can produce a more balanced outcome for wages. But it is not clear what policies can be effective in reversing the decline in labour income share without damaging the economy. Hence, the real challenge facing labour is not its weak bargaining power but rather how information disruption is overrunning the traditional defences to wage and work regulation. What is important to figure out is how labour policies and regulation should evolve in response to the changing organisation of work.
David A. Price (Fourth Quarter 2017) “Interview: Jean Tirole”. Federal Reserve Bank of Richmond. https://www.richmondfed.org/publications/research/econ_focus/2017/q4/interview
Phuah Eng Chye (27 January 2018) “The sharing economy: A futuristic taxi landscape (Part 3 – Pricing fares the same way as stocks)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-sharing-economy-a-futuristic-taxi-landscape-part-3-pricing-fares-the-same-way-as-stocks/
Phuah Eng Chye (26 May 2018) “Labour share of income (Part 1: Theories and measurement)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-1-theories-and-measurement/
Phuah Eng Chye (2 June 2018) “Labour share of income (Part 2: The difficulty of overcoming wage stagnation)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-2-the-difficulty-of-overcoming-wage-stagnation/
Phuah Eng Chye (9 June 2018) “Labour share of income (Part 3: Causes of wage inequality)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-3-causes-of-wage-inequality/
Phuah Eng Chye (16 June 2018) “Labour share of income (Part 4: Does wage inequality matter)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-4-does-wage-inequality-matter/
Phuah Eng Chye (23 June 2018) “Labour share of income (Part 5: The quandary of labour reform)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-5-the-quandary-of-labour-reform/
Phuah Eng Chye (30 June 2018) “Labour share of income (Part 6: The missing big picture)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-6-the-missing-big-picture/
Phuah Eng Chye (7 July 2018) “Labour share of income (Part 7: The respective roles of wages and profits)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-7-the-roles-of-wages-and-profits/
Peter F. Drucker (1950) The new society: The anatomy of industrial order. Transaction Publishers.
 Interview by David A. Price.
 Phuah Eng Chye “The sharing economy: A futuristic taxi landscape (Part 3 – Pricing fares the same way as stocks)”.