White Paper

This paper takes a fresh look at the causes of the rise of inequality in advanced economies, focusing on the relationship between labor market institutions and the distribution of incomes—which has featured less prominently in recent debates. We find evidence that the erosion of labor market institutions is associated with the rise of income inequality in our sample of advanced economies, notably at the top of the income distribution. Our key findings are that the decline in unionization is related to the rise of top income shares and less redistribution, while the erosion of minimum wages is correlated with considerable increases in overall inequality. There is also some evidence that the broad extension of collective agreements to non-union members is associated with higher inequality, likely owing to higher unemployment. Finally, we confirm that financial deregulation and lower top marginal tax rates are related with higher inequality.

Working nine to five for a single employer bears little resemblance to the way a substantial share of the workforce makes a living today. Millions of people assemble various income streams and work independently, rather than in structured payroll jobs. This is hardly a new phenomenon, yet it has never been well measured in official statistics—and the resulting data gaps prevent a clear view of a large share of labor-market activity. To better understand the independent workforce and what motivates the people who participate in it, the McKinsey Global Institute surveyed some 8,000 respondents across Europe and the United States. We asked about their income in the past 12 months—encompassing primary work, as well as any other income-generating activities—and about their professional satisfaction and aspirations for work in the future.

Job polarization refers to the shrinking share of employment in middle-skill, routine occupations experienced recently, over the last 35 years. Jobless recoveries refer to the slow rebound in aggregate employment following recent recessions, despite recoveries in aggregate output. We show how these two phenomena are related. First, essentially all employment loss in routine occupations occurs in economic downturns. Second, jobless recoveries in the aggregate can be accounted for by jobless recoveries in the routine occupations that are disappearing.

We see glimpses of that tomorrow today. 2010 has ushered in a new decade, a new economy and a new ecosystem for small businesses and their customers. Effects of the Great Recession will continue to reverberate globally, with slower growth, less credit and greater uncertainty churning the marketplace. Yet, in spite of this turbulence, a new economy will grow, one that holds promise for business large and small, and consumers around the world.

Historically, technology has enabled an unprecedented growth in labor income, but has also been a source of disruption. Technology has boosted productivity, which, in turn, has driven strong per-capita GDP growth and has been associated with expanding employment. However, the gains in employment and income can come in spurts and tend to favor different sectors over time. This forces deep and sometimes painful structural adjustment, with jobs changing or disappearing in some areas while new jobs are being created elsewhere. Moreover, while there are many reasons for the decline in labor income shares over the last three decades, technological progress in capital goods has played a role. Finally, the distribution of labor income itself has become more unequal as some skills—particularly those associated with more routine tasks—have become redundant, leading to a polarization of income gains favoring high-skilled and disadvantaging low-skilled labor. Technological advances are likely to have a similar impact in the future. Two interrelated factors that have been driving the impact of technology in the past are expected to continue to do so going forward: i) automation or, more broadly, an increase in the extent to which capital can technically substitute for labor; and ii) the falling relative prices of capital goods (which encourage the replacement of labor for a given degree of substitutability). Automation could allow machines to perform cognitive but routine tasks now handled by humans. This would put particular pressure on low-skilled labor doing routine work. Illustrative model simulations indicate that the more easily capital will substitute for labor, the more productivity and overall income growth will pick up, but the more this is likely to increase inequality by favoring income from capital and higher-skilled work. A decline in capital goods prices is also likely to benefit the high-skilled vis-à-vis the low-skilled. Transitions can be costly. An advance of automation and falling relative prices of capital goods can be expected to entail similar labor market disruptions as technological progress in the past: skill mismatches will have to be overcome; investment in human capital will have to be financed in the presence of credit constraints, especially for low-income households; and some workers could be dropping out of the labor force altogether. While a significant shift in technology requires adjustment across all skill levels, adjustment will likely be more difficult and costly for the low-skilled. And technology will have repercussions beyond labor market adjustment. Technology and global economic integration are intertwined and affect cross-country income convergence. For instance, new technologies could increase concentration in product markets and reduce labor shares. They can also redefine the boundaries of firms and the role of employees, potentially fissuring the workplace. Policies can change the impact of technological change. Depending on societies’ preferences for growth versus income equality, governments may want to distribute the gains from technology more evenly. Certain policies, if well designed, could mitigate the trade-off between both objectives. For example, illustrative model simulations show that higher education spending would not only allow low-skilled workers to participate in the gains of technological change, it would also increase output; this holds even when taking into account that higher spending will require higher rates of taxation. More generally, while the use of the tax/benefit system to redistribute the gains from technological advances tends to come with some loss in efficiency, the resulting loss in output tends to be relatively small. Other relevant policies include stronger and portable social safety nets centered on empowering and protecting workers (rather than preserving jobs). Competition policies might have a role to play as well—e.g., in response to more market concentration driven by digitalization—but will have to be mindful of the complex relationship between market power and the creation and diffusion of new technologies.

Industrial and technological revolutions have historically resulted in the growth of economies and productivity, as well as the creation of new jobs. Despite short-term challenges arising from the replacement of manual labour and the need to upscale skills and competencies, the pace of transformation allowed time for education and training to catch up, and to equip low and mid-skilled workers with the new skills and competencies required to function productively. Today, many studies show that technology is being adopted at an exponential rate, replacing middle-level skills that were once considered uniquely human and placing the world of work in a state of flux. Dynamic processes such as digitalisation, the growth of the digital economy and technological advances, coupled with profound changes in the organisation of work, globalisation, demographic change, environmental challenges, as well as new ways of organising the production of goods and the delivery of services, provide a myriad of opportunities to society while at the same time presenting considerable challenges. This document has two parts: Part I (Chapters 2-4) looks at the trends in the world of work and Part II (Chapters 5 and 6) explores possible policy questions, responses and next steps.

The macroeconomic outlook for sub-Saharan Africa continues to strengthen. Growth is expected to increase from 2.7 percent in 2017 to 3.1 percent in 2018, reflecting domestic policy adjustments and a supportive external environment, including continued steady growth in the global economy, higher commodity prices, and accommodative external financing conditions. While fiscal imbalances are being contained in many countries, the adjustment has typically occurred through a combination of higher commodity revenues and sharp cuts in capital spending, with little progress on domestic revenue mobilization. Over the medium term, and on current policies, growth is expected to accelerate to about 4 percent, too low to absorb the likely flow of new entrants into labor markets. The outlook is surrounded by significant downside risks, particularly considering the elevated policy uncertainty in the global economy. Shielding the recovery and raising medium-term growth would require reducing debt vulnerabilities and creating fiscal space through more progress on domestic revenue mobilization, and policies to achieve strong sustainable and inclusive growth.

Women continue to be the most underutilised and potentially game-changing factor for a fair and prosperous future of work. As ILO approaches its centenary anniversary, this report aims to look to the future and the potential of decent work to transform the lives of women and men in a future of work which leaves no one behind. The report draws attention to opportunities for progress, practical measures and outlines some potential drivers of future labour market transformation. This publication of this report was made possible with the generous support of the Australian Government’s Department of Jobs and Small Business.

This paper reviews recent trends in the labour share in G20 countries (and over a long period of time in a few) and discusses possible causes of the observed trends. It then explores linkages between the labour income share and the main components of aggregate demand. Other critical issues such as the growth and employment impacts of the labour share and policy implications are raised in the paper “Strengthening the link between employment and growth” submitted to the EWG meeting of 26-28 February 2015 and will be discussed in more detail in a follow-up paper for the third EWG meeting (23-25 July 2015).