The share of labour income-to-GDP is purely a reflection of the underlying structure of the economy. It is a meaningless target.
Government policies should aim to raise wages and incomes for its people. We are in complete agreement with this objective. That is why we were disappointed when the Malaysian government recently announced the target of 45% labour share of total income as the way to address the country’s chronic low-wage environment. The target — one of seven in the Madani Economy policy framework — may make for a good sound bite to the man in the street, but the 45% ratio in and of itself is meaningless. Yes, it may be achievable in the long run — as seen in many developed countries — but certainly not in the way many would envision or what prevailing narratives seem to suggest.
Labour income share measures the portion of total economic output (or gross domestic product [GDP]) that goes to workers, as compensation for their labour. The balance accrues to businesses (capital owners) after netting out the share of GDP that goes to the government as taxes. Thus, in the most simplistic view, a low labour income share conjures an image of “greedy” employers and “suffering” employees. To raise wages and reduce inequality, one would then seek to redistribute income from capital to labour — that is, raise the labour income share, whether through a progressive wage policy or other forms of government intervention. Simple, yet also completely wrong. And one is reminded of the aphorism, “The road to hell is paved with good intentions”. Why do we say this?
