From Mr Fredrik Erixon.

Sir, The new World Economic Outlook by the International Monetary Fund has been seen by many as evidence for the unfavourable effect of globalisation on labour in countries in the Organisation for Economic Co-operation and Development. A distinct pattern in this era of globalisation has been the falling shares of labour income in gross domestic product while the compensation to capital has increased its relative position. Martin Wolf ("Employment policies can ensure a fair share of the feast", April 11) corrects many of the misinterpretations: technological change is the chief explanation of this development, and labour market inflexibilities in several OECD countries adversely affect real employment, thus lowering the shares of labour income. Moreover, real income growth for labour has also been strong in the last decades.

But there are several additional factors overlooked by the IMF and others when explaining the falling shares of labour income in GDP. The missing pieces are also important for an adequate design of policy.

First, the division between compensation to labour and to capital rests on the notion that these two categories can be separated. In a Marxian world of the 1840s that was true, but not today. Labour also gets income by individual savings and via institutions such as pension funds. Far from all of these savings get recorded as compensation to labour. This trend has indeed been strong and will grow considerably in future, not least due to the deterioration of public pension schemes in several OECD countries. Governments could provide better opportunities for labour to invest and reap an increasing share of compensation to capital.

Second, globalisation has been unbalanced. Globalisation has been particularly strong in the manufacturing and technology-intensive sectors. Real prices of goods have fallen significantly in rich countries with increased opportunities to trade and the entry into the world economy by millions of workers (the global labour-supply shock). But many skilled labour-intensive service sectors, harbouring a considerable export potential for OECD countries, are essentially non-tradable sectors. Different forms of trade barriers (foreign and domestic) prevent developed countries from exploiting their comparative advantages in several sectors. This is particularly true for services produced, regulated or financed by governments. The global demand for healthcare increases at a tremendous pace, but healthcare providers in OECD countries have done little to access this market.

This imbalance, as trade theory suggests, has considerably slowed income growth for labour in skilled sectors and has adversely affected the general share of labour income in GDP.

Fredrik Erixon,

Director,

European Centre for International Political Economy (ECIPE),

B-1000 Brussels, Belgium