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Declining labor-labor exchange rates as a cause of inequality growth

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  • Tangian, Andranik S.

Abstract

The current trends in the capital/labor split and the impacts thereof on the growth of inequality are one of the main concerns of national governments, European Commission and international organizations like UN, ILO, IMF, OECD and WB. These trends are usually studied at the macro level of functional distribution of income, that is, among capital and labor, and less with regard to productivity, remuneration policies or some other particular factors. In this paper, we contribute to the studies of the second type, explaining the decreasing labor income share in terms of unpaid working time and underpaid hourly earnings. For this purpose, we refer to the decreasing labor-labor exchange rate, i.e. devaluation of one's labor in exchange for other's labor embodied in the commodities affordable for one's earnings. We show that the productivity growth allows employers to compensate workers with always a lower labor equivalent, i.e. increasingly underpay works, maintaining however an impression of fair pay due to an increasing purchasing power of earnings. This conclusion is based on the OECD 1990-2014 data for G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom and United States) and Denmark (known for the world least inequality). Then statistically significant implications for the growth of inequality are derived and some policy suggestions are formulated like taxing the enterprises with the inner Gini that surpasses the national level.

Suggested Citation

  • Tangian, Andranik S., 2017. "Declining labor-labor exchange rates as a cause of inequality growth," Working Paper Series in Economics 104, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  • Handle: RePEc:zbw:kitwps:104
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    Keywords

    inequality; productivity; hourly earnings; consumer prices; housing prices; labor-labor exchange rate;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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