Decreasing labor-labor exchange rate as the cause of inequality growth

The Thomas Piketty’s (2013) book Capital in the 21st century, suggesting a vast overview of the history of wealth accumulation and inequality, made inequality a mainstream topic in economics. One of the book’s theses is that the historical accumulation of capital enhances its contribution to general productivity, particularly due to investments in research and development. This implies an increasing role of capital owners and capital managers, explaining a disproportional increase in their income, which implies a significant inequality growth in recent decades. Thereby the increasing inequality, though morally criticized, is indirectly justified economically.

It should be noted that labor develops parallel to technology. Workers are becoming better educated and more advanced technically. They operate complex expensive equipment and bear responsibility for its safety. As a result, labor is progressively becoming more efficient. The increasing role of skilled labor is reflected in its promotion in terms of `human capital’ and `human development’, equalizing its importance to industrial and financial capital. Therefore, increasing capital’s share in gains can hardly be justified even economically. Taking into account advances in labor, increasing capital income looks like an attempt to minimally pay workers just to guarantee the reproduction of labor, which becomes always easier in the background of growing productivity.

Inequality growth during the last quarter century is explained as caused by a decreasing labor–labor exchange rate, i.e. devaluation of one’s labor in exchange for another’s labor embodied in the commodities affordable for one’s earnings. We show that productivity growth allows employers to compensate workers with a lower labor equivalent, i.e., in a sense increasingly underpaying work, 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's least inequality). Finally, it is shown that the dependence between the degree of inequality and the degree of decline in the labor–labor exchange rate is statistically highly significant.