The biggest force behind the global profit margin expansion has been the decline in the labor share of output. A key factor that has contributed to this reduction in labor’s bargaining power versus capital is the decline of organized labor and unions. This phenomenon has occurred over decades for an array of reasons that are intertwined with the other forces acting on margins—like access to pools of cheaper foreign labor and advancing automation technology.
As you can see below, the change in union participation rates has been broad-based and has extended to most European countries and Japan, which have historically had stronger labor protections relative to the United States.
While this phenomenon has been broad-based, it has happened to varying degrees in different countries. Corporations located in countries with more flexible labor markets have been able to squeeze more benefits from labor. The chart below compares our aggregate measure of labor flexibility—based on our secular productivity study, available at economicprinciples.org—to changes in margins, highlighting this pattern.
This dynamic has been a key driver of profit margins around the world. Real wages have lagged productivity gains in the major developed world economies since the 1990s, allowing corporations to grab an increasingly larger share of the overall output. A big force driving this phenomenon was the massive pool of cheap labor coming online in China, which depressed labor wages across the developed world (we discuss this in detail in the next section). In this process, wages in China were bid up from low levels, leading to the structural decline in profit margins for Chinese companies.
Chosen excerpts by Job Market Monitor. Read the whole story at Bridgewater Associates, LP | Peak Profit Margins? A Global Perspective
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