How can we quantify the wage share implied by varying degrees and types of participation to Global Value Chains?
A stable labor share has long been a stylized fact of advanced capitalist development (Kaldor, 1961). A key premise was that productivity increases would accrue to labor through real wage increases, which would tend to hold constant the share of wages in net output.
But in fact, the labor share has steadily declined in advanced economies at least since the early 1980s (Karabarbounis and Neiman, 2014). Attempts to explain this decline typically point to – at least – three channels (Riccio et al., 2022). First, institutional considerations: declines in unionization and dismantling of minimum wage legislation have impacted the bargaining power of workers (Farber et al., 2021), leading to a long, grinding path of ‘wage repression’ (Taylor and Ömer, 2020) and a slowdown of productivity growth (Storm, 2019; Fontanari and Palumbo, 2022). Second, labor-saving technological change, for instance, due to the lack of technical complementarity between certain types of human labor and capital. That is, with the growth of ‘routinization,’ labor displacement has occurred in occupations highly exposed to automation. Finally, the long-standing polarization across differing skill levels of the workforce linked to de-industrialization (Bárány and Siegel, 2018).
While all these explanations may play a role, these processes did not unfold within each country in isolation. In fact, the early 1980s coincided with the gradual consolidation of ‘hyperglobalization’ (UNCTAD, 2017, p. 21). A key component of this extensive deregulation of product, financial, and currency markets was the articulation of inter-country supply schemes, that is, international production fragmentation. Under such schemes, international outsourcing — and offshoring practices more in general — grew in importance, to the point of configuring global value chains (GVC, hereinafter).[1]
And while GVCs are erected by lead firms in advanced industrial economies, they rely on input suppliers from developing countries. For the latter, hyperglobalization started in the midst of structural adjustment policies in response to debt crises, which implied the dismantling of decades of import-substitution industrialization (ISI) efforts and a shift towards an export-oriented strategy based on import liberalization (UNCTAD, 2018, p. 40). These trends accelerated in the 1990s and early 2000s to the point that “GVCs killed import substitution as a viable industrialization strategy” (Taglioni and Winkler, 2016, p. xiii).
Hence, GVCs changed the nature of international specialization: in tasks of production, rather than integrated final products, with an ensuing change in the international division of labor. It is difficult to think that such a transformation of the labor process at an international scale would have left functional income distribution on a stable steady path.
However, the relationship between trade integration and wage inequality is complex and ambiguous. It may change if we refer to total wages, the wage share, or wage rates (Farole et al., 2018). Even more so if we distinguish between advanced and developing economies, i.e. between the ‘global North’ and the ‘global South’.
Some perspectives suggest that the effect of GVC participation on the distribution of wages is small and it may reduce wage inequality within low-skilled segments of the workforce (Lopez Gonzalez et al., 2015). Other views acknowledge that there may be short-run inequality increases but that offshoring is inequality-reducing in the long run for developing economies (Carpa and Martínez-Zarzoso, 2022). Finally, some perspectives are more critical, suggesting contrasting effects between developed and developing countries, with detrimental labor market effects for the latter (Szymczak and Wolszczak-Derlacz, 2022; Ndubuisi and Owusu, 2022).[2]
At any rate, quantifying the implications of globalization for functional income distribution is crucial to understand the steady decline in the global share of wages. And understanding such trends is of great importance, as regressive functional income distribution represents an obstacle for socially inclusive trade integration schemes.
Hence, the question is: how can we quantify the wage share implied by varying degrees and types of participation to GVCs?
My new INET working paper examines this question in detail by devising novel metrics using global Input-Output techniques (Timmer et al., 2013) to connect country-level functional income distribution with its activating sources of final demand. The key distinction we study is that between country-level income, wages, and wage share activated by domestic vis-à-vis foreign final demand.
The intuition behind this distinction runs as follows. The wage share of a country is a linear combination of the wage shares of its industries. Industries produce to satisfy final demand requirements at home as well as abroad. Hence, when a foreign country demands final products directly supplied by the domestic economy or requires domestic inputs to be produced, it activates output at home, generating incomes, wages, and, therefore, an associated wage share.
But this domestic output activation across industries occurs in different proportions according to the products composing each specific foreign final demand basket. For instance, when a country in Latin America satisfies Chinese final demand, output from primary industries will be activated in a greater proportion than if the final demand came from another Latin American country, in which case mid-to-high-tech manufacturing products are produced (and traded) in a higher proportion. Thus, if primary commodities and mid-to-high-tech manufacturing products are produced by industries with different wage shares, there are distributive implications of deepening trade integration with certain regions with respect to others.
Moreover, given that the home country is often only an upstream producer of certain inputs in a GVC, it is far from apparent what the ultimate distributive implications of final demand from certain foreign countries are. This is especially so when the domestic economy does not have relevant direct trade linkages in final products with those economies but is mostly only indirectly linked by exporting inputs through other countries.
Hence, given the different commodity compositions of each final demand basket associated with a foreign source of final demand, the wage share activated at home by each foreign country will be different. This is crucial to understanding the distributive profile of domestic vis-à-vis international specialization.
The empirical results which emerged from applying this analytical perspective highlight important trends for rethinking alternative regional integration projects to create a more inclusive multilateral trade system.
To begin with, the results confirm that we now live in a world of declining global wage shares, even as globalization falters. The wage share distribution across countries for each industry has become more uniformly unequal, suggesting that the prevalent mode of international competition has become one based on labor cost reductions, with a similar disconnect between real wage and productivity increases.
In terms of shares of global income, the world economy has seen a decline in the global North and a rise in the global South. In particular, the novel importance of South-South interactions in global trade does not arise due to only a few key players in the South — such as BRICS — but is rather a generalized phenomenon: countries in the global South are now almost equally reliant on foreign final demand from both global areas of the world economy.
Within the global North, we can see a clear process of cross-country convergence in wage shares activated by both domestic and foreign final demand: countries with higher initial wage share had the lowest increases or, actually, the highest decline. Within the global South, while a catch-up process with an increasing wage share activated by domestic final demand is present, whether GVC integration has accelerated wage share convergence in any specific direction is unclear.
As regards changes in the final demand engines of the world economy, China’s final demand channeled towards other countries in the global South accounts for a crucial part of the diffused increase in South-South GVC integration. Hence, the country-specific commodity composition of Chinese demand abroad may bear important consequences for income distribution in countries of the global South.
Results also suggest that successful — in terms of increasing GVC income shares — international specialization seems to be characterized by the homogenization of the product composition of final exports towards industries with relatively higher wage shares.
Hence, technological upgrading in itself may not be enough for securing inclusive growth. Instead, it may need to be combined with efforts toward homogenizing the commodity composition of destination-specific final export baskets. In sum, leveraging on scale economies applied to technology-intensive products. Countries should deepen productive integration with trade partners allowing for such a virtuous circle.
Aggregating countries into regional groups provided us with further insights into how inter-regional trade interactions may impact functional income distribution. We find that key regions in the global North (North America and Developed Asia-Pacific) exert downward pressure on wage shares of other source regions. This may be reflecting power asymmetries between lead firms and input providers along GVCs. In any case, it is noticeable how regions in the global South that have increasingly appropriated shares of foreign-activated global income —– such as China (CHN) and India (IND) –— are also exerting a downward effect on wage shares of some of their trade partners. Hence, it would seem as if moving up the ladder of technological upgrading would be associated with exerting a negative effect on the wage share of other regions.
Finally, the evidence indicates that, for some regions of the world economy, intra-regional integration exerts a positive effect on foreign-activated wage shares. This was the case for Latin America and Southern Europe, leading us to reconsider the potential of such integration strategies in the pursuit of inclusive growth.
References:
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Endnotes
[1] The expansion of international outsourcing practices could be traced already to the 1970s, when ICT innovations allowed for headquarter-based control of a remote, low-wage labor force (Lazonick, 2009) or a corporate “move into high-profit centers of the Third World” (Ferguson and Rogers, 1986, p. 93).
[2] Moreover, interactions between institutional, technological, and compositional factors and globalization also play a role. For instance, international outsourcing creates a decentralized labor force with non-existent physical interactions that cannot collectively organize, further eroding labor’s bargaining power (Milanovic, 2019, p. 22).