Scottish Economy Watch

The STUC's valuable report A Just Scotland see here, raises many interesting questions which the two campaigns for and against independence need to address. One issue they raise in the report is the labour market and the lack of a debate on the likely structure and regulation of the labour market in different constitutional scenarios.

The STUC clearly fears that the current UK approach favouring flexible labour markets has been accepted by both sides of the constitutional debate when they believe the issue should be debated.

I agree.

The STUC argue that flexible labour markets produce "an economy where work is less well paid, less secure and less permanent." In addition, they note the "completely overlooked" macroeconomic consequence of a falling wage share, which, they go on to suggest:

If the wage share in the economy of an independent Scotland continues to fall then the only way in which the products and services the economy produces can be consumed is through rising debt. This hardly provides for the foundations of a stable, prosperous society. (Page 13)

While welcoming further debate, I think the issue is a little more complicated than this.

First, there is an issue about flexibility. A labour market lacking in regulation seems certain to produce 'sweat shop' conditions, low wages and insecurity. Conversely, a labour market that is heavily regulated seems likely to lead to high hiring costs and low job creation. I'd like to see what the evidence shows on this.

The issue then is can we find an 'optimal' degree of labour market regulation and flexibility that protects workers from vindictive and exploitative employers, while at the same incentivising firms to hire workers and so create jobs? That is the question where I would like to see more theory, evidence and debate.

Secondly, the data on labour shares do not, as far as I can tell, support a view that labour's share of income has been consistently falling in Scotland. The latest Scottish National Accounts Project (SNAP) - experimental - data on compensation of employees is shown in the chart below

Clearly, the data only start in 1998 so I am not sure if the share was falling during the 1990s after the so-called 'Thatcher revolution'. But what the SNAP data show is a rising labour share from 59 per cent to 66 per cent between 1998 and 2001. Then the share fell gently to 62% at the beginning of 2008 when the recession was beginning to bite. During the recession and after the share has oscillated around 63 per cent.

So there is no downward trend during this period of data and other factors seem to be in play as a determinant of labour income share in addition to the UK's fairly flexible labour market regime.