Declining Labor-Labor Exchange Rate As a Cause of Inequality Growth

The current trends in the capital/labor split and the impacts thereof on the growth of inequality are analyzed in more intelligible terms of unpaid working time and underpaid hourly earnings. For this purpose, we refer to the decreasing labor–labor exchange rate, i.e. devaluation of one’s labor in exchange for other’s labor embodied in the commodities affordable for one’s earnings. We show that the productivity growth allows employers to compensate workers with always a lower labor equivalent, i.e. increasingly underpay works, 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 least inequality). Then statistically significant implications for the growth of inequality are derived and some policy suggestions are formulated.