By Disha Sachdeva,

Edited by Nandita Singh, Senior Editor, The Indian Economist

Remember that scene from Charlie and the Chocolate Factory? The one where Charlie’s father loses his job because his employers found a machine that could put lids on toothpaste more efficiently than humans.

That is possibly the one scene in the movie that is very real to our times, which is also sad since we all would rather see a chocolate wonderland and singing gnomes.

Income is distributed between labour and capital. In recent times, quite a number of researchers have found that the share of income going towards labour has been declining even though income’s distribution should preferably be stable between the two. This is mainly due to the decline in prices of industrial goods like machinery and even robots. Hence, firms have started investing more in technology and less in labour’s remuneration as capital seems more productive. This result implies a high level of elasticity of substitution.

A recent research of 54 countries including India and China revealed that even labour abundant countries like these two have experienced a significant decline in their labour shares since the past 20 years.  This is great news for shareholders who are benefitting from the productivity and profitability these machines provide, as reducing labour shares means a less rise in pay. However, the bigger story is about what will happen to the livelihood of the 50th percentile worker rather than to the wealth of the 1 percent. Also jobs requiring mid level skills like book keeping have declined more compared to low and high skilled jobs.

This fall can also be attributed to employment laws. For example, in the late 1970s, European workers enjoyed high labour shares due to stiff labour market regulation, but after privatisation, labour’s hold on income was weakened.

Keynes called this technological unemployment.

This will give rise to income inequality and even unemployment. Some economists—most prominently Raghuram Rajan in his book Fault Lines—have suggested that rising income inequality contributes to debt accumulation and financial imbalances, and eventually leads to financial crisis.

Stability of labour happens to be a key component of macroeconomics, and labour needs to share the growth rate of an organisation even though they do not have circuitry. Accelerating technology needs to improve people’s standard of living, not spoil it, as currently workers are being forced into competition with each other as well as machines.

Disha Sachdeva is a 2nd year student pursuing Bachelor of Commerce from Shri Ram College of Commerce. Her biggest fear is that her ‘To Be Read’ list might be longer than her life expectancy. She is a feminist who prefers to hear both sides of a story before forming her opinion. She tries to balance her academics, societies, MBA preparation and attendance together and hopes to be fluent in Dothraki one day!

Posted by The Indian Economist | For the Curious Mind