Standard Life Investments

Press Release

The Rise and Fall of Labour and Capital

24  September  2014

Standard Life Investments, the global investment manager, has examined the long-term drivers of the changing share of national income between labour and capital. While some of the factors affecting income shares and income inequality may reverse in coming years, pressures are growing on politicians to act. Governments should keep in mind that they are best pursuing policies that have the double dividend of lowering inequality and boosting economic growth.

The latest edition of Global Perspective examines changes in the way that national income is distributed within the developed world. Not only has labour’s share of national income fallen in most OECD countries, but there has also been a widespread increase in income inequality. Both country-specific and global factors lie behind these trends. The key factors include globalisation, technological change, tax policy and changes in workers’ bargaining power.

Jeremy Lawson, Chief Economist, Standard Life Investments, said:

Jeremy Lawson

"Our findings show that there are significant implications for financial markets, not only as the economic cycle moves forward and structural drivers alter but also as pressures grow on governments to act. We expect the economic recoveries taking place in most countries to generate a modest increase in labour income shares as unemployment falls away, although it is unlikely to make up for the losses of previous decades. That implies that the corporate profit share of income should fall but not far"

"If market forces are not able to generate a more equitable distribution of society’s resources, governments will come under pressure to act. For example, earned-income tax credits, other well targeted fiscal transfers, and active labour market policies all strengthen the incentives to work, or rewards from employment, and are therefore more likely to have a positive growth trade-off than sharply raising marginal income tax rates or strengthening employment protection. Slower acting but equally important are educational and training policies that raise the human capital/skills of lower income workers."