1 Causes and consequences of the declining wage share

According to the common interpretation, the wage share is the ratio of total macroeconomic wage costs (gross wages and social security contributions paid by employers) to the gross domestic product (GDP). In past decades, until the 1980s, the wage share was more or less steady, which was in line with the prevailing growth theory of that period and left economists in a convenient position. The distribution of income was taken off the agenda: research essentially focused on growth and the smoothing of business cycles. Important changes occurred from the end of the 1970s: wage shares gradually decreased, which could not be explained by the prevailing income distribution theory. The phenomenon could not be attributed to technical impacts (restructuring), and thus there was an increasing demand among economists to understand the phenomenon more deeply. In his bestseller, Piketty (2013) comes to the conclusion that it is a feature of the capitalist economy that the wage share moves on a declining path, unless it is interrupted by some external effect (war or state intervention). He ascribes the decrease in the wage share to the two basic laws of capitalism, formulated by him, according to which capital incomes inevitably rise faster than the national income. Although the profession welcomed the book, in the analytical part a number of problems were revealed, as a result of which Piketty's distinct conclusions and extrapolations have failed to gain widespread acceptance. There is no consensus among economists in respect of the impact of technological progress on the wage share. Based on the IMF's calculations, technological progress and rising productivity reduced the wage share in countries where the initial exposure to automation was high. According to other analyses, it was actually the deceleration in productivity that caused the wage share to decrease. However, economists agree that globalisation in the broad sense of the word, i.e. the cross-border movement of final goods, services and factors of production, had the effect of lowering the wage share in certain countries, particularly in the developing economies. The wage share of foreign-owned companies lags substantially behind that registered at domestic companies, and this is the case in Hungary as well. Institutional explanations include the fall in trade union coverage and outsourcing as factors causing the wage share to decrease. The decrease in the wage share reduced consumption in all countries under review. In terms of aggregate demand, the impact of the simultaneous increase in the share of profit on investments was not sufficient to offset the decrease in consumption. The decrease in the wage share improved export competitiveness and the volume of exports, but this has not offset the decrease in domestic demand: according to the calculations, in the EU15 as a whole a fall of one percent in wage share caused GDP to decrease by 0.3 percent. Several international institutions found a connection between changes in the wage share and the rise in inequality. In their paper, Berg and Ostry (2011), concluded that countries that develop with smaller inequalities are generally able to achieve more sustainable growth. Naturally, it would be a mistake to conclude that the change in the wage share alone explains the change in inequality, but it plays an undisputable role due to the unequal distribution of capital incomes. In addition, the wage share also influences a country’s economic stability.