Blue-Collar Wage Stagnation in Sweden

The Swedish Television program Document Inifrån argued that capital is taking a larger share of Swedish income at the expense of labor. The show relies on a graph by Lund University economic historian Lennart Schön. Here is a picture of the graph. 

Dan Nordling and I have pointed out that a falling labor share goes agains the conclusions by Swedish agencies following this topic such as Konjunkturinstitutet and Riksbanken. Nor is it supported by my calculations based on SCB-data 1980-2011. 

Measuring the share of income that goes to labor and capital respectively is complicated. You have to do several adjustments, including taxes and capital depreciation

I think I know why Lennart Schön is getting different results. While he adjust for taxes, he does not appear to be adjusting for capital depreciation. Second, Schön is not measuring the labour share in the total Swedish economy. He is measuring the labour share in Swedish industry, a subsegment of the economy.

Here is another estimate of the labour share by the prominent globalization scholar, Stockholm University Professor Karolina Ekholm. In this graph for her report for Globaliseringsrådet, we see that the labor share has not changed significantly since 1970. 

Where Document Inifrån goes wrong is trying to explain wage stagnation today using theories better suited for the 19th century. In the 19th century and early 20th century the main distributional conflict in society was between capital and labor. Today, that is simply not where the action is. The redistributary struggle now stands between highly paid, highly skilled labor and low paid, low skilled labor. Inequality has increased a lot in western countries, but not because capital is taking a significantly bigger share of gains.

In fact in our economy we have lots of capital, which means it is no longer very scarce. In the 19th century industrial capital was rare and and thus got a large premium. Today it is human capital that is relatively scarce and more productive and therefore gets a large premium.

Between 1970 and 2010 real wages of Swedish blue collar workers only increased by about 1 percent per year, during a period when per capita incomes increased by 1.7 percent per year. Document Inifrån is not wrong when pointing out that blue collar wages are stagnating in Sweden. Where they go wrong is assuming that this is due to profits having gone up, as theorized by simple Marxist models. 

In fact that is not happening, the profit share in Sweden has remained fairly stable during the last 40 years. What is happening is that highly skilled, educated workers are getting a bigger share of the pie. Wages are not just something that goes to blue collar workers. Someone working in an investment bank or law-firm and earning millions per year is often also mostly getting paid in wages.

Between 1991-2011 the real income of the top ten percent increased three times faster than the income of the bottom half, according to SCB. Around 20 years ago there were about 6000 Swedes who earned more than 1 million kronor per year, in today’s kronor. By 2011 there were 50.000 who earned more than 1 million kronor per year. The reason for increased inequality is likely technological change and globalization. I also suspect that the deregulation and subsequent rise of the modern fiance industry is a key explanation for top incomes exploding since around 1980.

Wage stagnation for workers is a important issue that should be investigated and solved, since it effects the majority of the population. About two thirds of Swedes do not have a college degree. However when trying to understand and solve the phenomenon of wage stagnation, we should look at modern explanations. Incorrectly assuming the economy still revolved around the outdated conflict between workers and passive capital owners will get you nowhere. Today you have to study inequality within employees, not just between employees and capitalists.

We should not exploit the mistake by Document Inifrån regarding the falling wage share to dismiss the problem they are pointing to. Among libertarians in Sweden there is a tendency to try to solve every social problems by lowering wages for the low-income workers.  

Artificially raising wages for low-income workers above what productivity permits is bad policy, as it tends to increase unemployment and social exclusion. However, lowering wages is always a second-best solution to social ills. It is thus important to aggressively pursue all avenues to improve the productivity of low-income workers. Examples are lowering the wage costs without cutting wages by lowering taxes.  

The attitude that ”cheap labor” is a good in itself is misguided. That is a deviation from classical liberalism, which frequently emphasizes the importance of relatively high middle-class and working class wages for prosperity and for the legitimacy of the liberal order.

The main justification for why ordinary workers should support capitalism is that capitalism leads to their standard of living rising. Despite the caricature of the left, The Chicago School of Economics is focused on finding economic policies that will raise income for ordinary people in the long run through productivity growth. The aim is not lowering wages and thus the standard of living of workers, who happen to be the majority of the population. If you were a struggling blue-collar worker, would you support a bunch of high-income libertarians whose only “solution” to inequality and labor market problems is denying them and argue for  further pressing down wages?

While the economy cannot raise wages much faster than productivity without causing unemployment, it is rarely the best or only solution to lower wages. To solve unemployment it is better to raise productivity and to cut taxes so that people can find employment at reasonable wages.

Document Inifrån should have focused on the important issue of wage stagnation among ordinary workers instead of hurting their case by incorrectly tying it to a rising profit share.