Asia defies western trend as workers grab larger share of economic pie

Workers in most major Asian countries have seen their slice of the economic pie rise in the decade since the global financial crisis, even as their peers in the west have seen their share of the spoils flatline or decline.

The figures, allied to solid economic growth in emerging Asia, suggest the region may be able to resist some of the political forces that emerged in the US and much of Europe. In the US, labour’s share of national income fell from a peak of 63.8 per cent in 1970 to 60.2 per cent at the end of 2008, according to data from the OECD, with capital receiving the remainder.

It has continued to decline since, hitting just 56.4 per cent last year, a slump that has fed into the narrative of middle-income workers going backwards as the forces of globalisation and technological progress have reshaped the world economy, as the first chart shows. The labour share has remained broadly flat in Japan and most major European countries since the crisis, but this is likely to have provided little succour given the sluggish pace of economic growth and, in some countries, a widening gulf between the wages of higher skilled and lower skilled workers.

Ben May, director of global macro research at Oxford Economics, said this was highly unusual, as the share of income accrued by labour has historically risen the longer economic expansions have run.

In contrast, labour has made strong gains in a number of Asian countries, led by China.

The Middle Kingdom had appeared to be following the lead of the US, with labour’s share of gross domestic product tumbling from a high of 60.6 per cent in 1997 to just 46 per cent on the eve of the global financial crisis in 2007, according to FT calculations based on data from the Asian Productivity Organization, an inter-governmental body. However the labour share has since bounced back to 60.3 per cent as of 2016, the most recent year for which figures are available.

(While the individual country trends are informative, the absolute numbers for Asia and the west are not directly comparable as the OECD data omit income from self-employment; government benefits or transfers that are not employment contingent; and benefits paid by employers to employees’ dependants. Vikram Lopez, analyst at Renaissance Capital, estimated that the labour share would be around 5-6 percentage points higher than in the OECD data when these income sources are factored in).

Robert Horrocks, chief investment officer at Matthews Asia, a San Francisco-based fund house, said he believed the pro-labour trend in China, and elsewhere in Asia, was largely the result of deliberate government policy. “One of the big criticisms of China is that it was growing on the back of cheap labour, that it was suppressing wages,” he said. “[But] the Chinese government has been raising the minimum wage, in many cities by 10-15 per cent, all the way through to 20 per cent on an annual basis in some of the second and third-tier cities. This has not been unusual since the global financial crisis. “There is underlying productivity growth and therefore wages have been growing, but on top of that there have been these minimum wage rises that have rippled through the wage structure so the worker has been winning out.”

Mr May said the data “fit with the idea that in China there is a social contract, which is not is some ways completely dissimilar to the postwar period in some advanced economies,” with the Communist party delivering rising living standards in exchange for maintaining power.

“You can argue that they have a strong incentive to ensure that everyone gains because it gives them their legitimacy,” Mr May said. “Preserving the one party system through prosperity for most is probably going to be the key driver of policy-induced labour share.” A similar pattern has unfolded elsewhere in Asia. Since the financial crisis, the labour share of income has jumped by 9-10 percentage points in Vietnam, the Philippines and Indonesia, although the latter’s numbers are highly erratic. It has risen by more modest amounts in India, Malaysia and Pakistan.

In contrast, in the west “there have been big falls since the 1970s, since the decline in the power of the unions,” said Mr May, with this factor being augmented by “globalisation and the surge in the number of people in the global labour force with the collapse of the Eastern bloc and subsequently China becoming outward looking”.

Mr Horrocks argued the trends in Asia and the US could not continue to go in opposite directions, and that any reversal would have investment implications.

“Labour has been gaining over the past seven to eight years [in Asia]. The effect has been to depress corporate profit growth to the advantage of labour,” he said.

“Profit margins have been better in the US. Why? because capital has been doing better than labour. But labour will come back in the west. Either a tight labour market will push wage growth above productivity growth, or there will be a swing in the political spectrum.”

In contrast, Mr Horrocks argued that growth in wage income in Asia was unlikely to continue to outstrip GDP growth. As a result he said the income split between capital and labour “will be much more balanced in the future”, so profit margins are not squeezed as much by rising wages.

This in turn “does make me a little more positive about Asian industries that are labour intensive, such as fast-food chains,” he added. —An arrangement with Financial Times