View
222
Download
0
Category
Tags:
Preview:
Citation preview
How to achieve a wage-led recovery?
The prospects for growth with equality in a globalized economy
Özlem OnaranUniversity of Greenwich
Different Dimensions of Inequality
• ↑ in top income shares –“working rich“• Growing low wage/precarious workforce –“working poor“• The rise in personal income inequality is interlinked with
functional income inequality • Real wages increasing at a lower pace than productivity• declining wage share• Global race to the bottom in the wage share in national income
– In the global north as well as the south since the 1980s
Broken linkage between wages and productivity
Global NorthWage share in national income (1960-2013)
*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: AMECO
19601962
19641966
19681970
19721974
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
201255
60
65
70
75
80
85
Euro area -12 countries
United Kingdom
United States
Japan
Global SouthWage share in national income (1970=100)
*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
200660
70
80
90
100
110
120
MexicoKoreaChinaIndiaSouth Africa
Why is capital’s victory empty?• Financial Times on 2013, Hermes Investment Conference
– Session: “Labour’s Uprising?”• 1950s, Henry Ford II took Walter Reuther, the leader of the auto
workers union to see his latest plant in Detroit. • ...just after the United Automobile Workers had gained another big
rise in pay and benefits for its members • The plant contained the first primitive pre-robots replacing workers in
some jobs. • Ford asked Reuther pointing at the machines:
– "Tell me Walter, how are you going to get them to join your union?"
• Reuther replied: – "How are you going to get them to buy your cars?"
• It takes two to tango!– Capitalism needs workers (wages) as much as capitalists (profits)
8
What is the problem?• Effect of increasing profit share on growth?• Mainstream
– wage=cost– positive effect on investment – Positive effect on exports
• Puzzle: Why is growth in the post 1980s lower and more volatile despite a rise in the profit share in most countries?
• Answer: Dual role of wages– Cost item– Source of domestic demand
9
Lower share of wages in national income (higher profit share)
1. lower domestic consumption- The poor consume more out of their income than the rich- Workers consume a higher proportion of their wages than the capitalists
consume out of their profits2. A positive effect on private investment but only partial
– Investment depends on profitability, but also demand3. higher foreign demand (Net exports=Exports-Imports)
– labour costs ↓ higher international competitiveness• if total effect is -: lower wage share lower growth, fewer jobs
– the economy is wage-led • if total effect is +: lower wage share higher growth
– the economy is profit-led– Mainstream policies assume all our countries, and the world as a whole is
profit-led, and claim that we need wage moderation for higher employment
Inconsistency of the Macro vs. Micro rationale
• Firm vs. aggregate/national • National vs. regional/global level• →race to the bottom in labour share
– international competitiveness effects are eliminated– makes economies more likely to be wage-led
What happens when wage share↓? (Onaran & Galanis 2012, ILO)
• The negative effect on consumption is larger than the positive effect on investment in both the developed and developing countries→ Domestic economy (consumption+investment) is wage-
led• Net export effects on growth not too important in large
economies, where exports and imports are only a small part of total demand→ large economies are wage-led
• Global race to the bottom: a 1%-point fall in the wage share – global GDP↓ by 0.36%
• Conversely a global wage-led recovery scenario: – Global GDP↑ by 3.05%, – Planet earth is wage-led, unless we trade with Mars!
How did the world grow despite declining wage share until the Great Recession?
• Potential crisis of demand deficiency • The expected outcome should have been a stagnation of global
demand and growth• This was mainly circumvented by two distinct growth models
• a root cause of the great recession
Debt-led growth Export-led growth
Center US, UK, Australia, New ZealandGermany, Japan, Netherlands,
Norway, Sweden, Austria, Canada, Finland, Belgium, Denmark
Periphery
Spain, Greece, Turkey, Portugal, South Africa, Ireland, Hungary, Czech
Rep., Slovakia, Estonia, Cyprus, Slovenia
China, Korea
Fragile → Great Recession 2008-2013
Policy Lessons• the limits of strategies of international competitiveness based
on wage competition in a highly integrated global economy• ↑wage share : egalitarian; does not harm growth potential • “The world needs a pay rise!”• Recovery needs a pay rise!• Wage/macro policy coordination
– avoid beggar thy neighbor policies• Recovery led by domestic demand & ↑ in the wage share
– a reversal of the ↑ inequality –a factor behind the crisis+political and economic stability
How to achieve a wage-led recovery? • Fall in the labour share is not an inevitable outcome of technological
change or globalization• Increase the bargaining power of labour
– union legislation, – increasing the coverage of collective bargaining, – establishing sufficiently high minimum wages, – regulating high/executive pay
• Bring the welfare state back• increasing the social wage via public goods and social security,
• Reregulate finance / Reverse financialisation• Effects of wage-led recovery on growth and hence employment
however is modest, albeit positive. • mobilize all the tools of economic policy with an aim to achieve full
employment, ecological sustainability, and equality.– green and purple jobs
How to close the jobs gap?
For further information:• Onaran, Ö. and Galanis, G. (2012). Is aggregate
demand wage-led or profit-led? National and global effects, ILO, Conditions of Work and Employment Series No. 31, Geneva.
http://www.ilo.org/wcmsp5/groups/public/---ed_protect/---protrav/---travail/documents/publication/wcms_192121.pdf
Wage share in national income (1960=100)
19601962
19641966
19681970
19721974
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
75
80
85
90
95
100
105
110
115
120
Euro area WSGermany WSFrance WSItaly WSUnited Kingdom WSUnited States WSJapan WSCanada WSAustralia WS
*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
Wage share in national income (1970=100)
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
200660
70
80
90
100
110
120
TurkeyMexicoKoreaArgentinaChinaIndiaSouth Africa
*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
Wage share vs. growth, EU15, 1960-2013
19601962
19641966
19681970
19721974
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
201258
60
62
64
66
68
70
72
74
76
-6
-4
-2
0
2
4
6
8
Adjusted wage share/GDP at current factor costGDP growth
Wage share declined further in 2010-11, pay freeze and austerity →the biggest treat to recovery!
Euro area-12 Germany France Italy UK US Japan Canada Australia1961-69 5.30 4.39 5.71 5.77 2.90 4.69 10.14 5.37 5.531970-79 3.78 3.27 4.15 4.02 2.42 3.32 5.21 4.11 3.071980-89 2.27 1.96 2.31 2.55 2.48 3.04 4.37 3.04 3.351990-99 2.15 2.32 1.86 1.43 2.24 3.21 1.46 2.44 3.322000-07 2.13 1.53 2.10 1.46 2.73 2.61 1.73 2.92 3.31
Turkey Mexico Korea Argentina China India South Africa1970-79 4.86 6.41 10.27 2.92 6.11 2.68 3.031980-89 4.08 2.21 8.62 -0.73 9.75 5.69 2.241990-99 4.02 3.38 6.68 4.52 9.99 5.63 1.392000-07 5.23 3.06 5.20 3.51 10.51 7.26 4.30
→globally lower growth, fewer and/or more precarious job creation Average growth of GDP (%)
Source: Onaran and Galanis 2012
The effect of a 1%-point increase in the profit share in only one country on
Consumption/GDP
Investment/GDP
Net exports/
GDPInitial change in private
demand/GDP% change in aggregate demand (D*multiplier)
A B C D (A+B+C) E GEuro area-12 -0.439 0.299 0.057 -0.084 -0.133 -0.245Germany -0.501 0.376 0.096 -0.029 -0.031 -France -0.305 0.088 0.198 -0.020 -0.027 -Italy -0.356 0.130 0.126 -0.100 -0.173 -United Kingdom -0.303 0.120 0.158 -0.025 -0.030 -0.214United States -0.426 0.000 0.037 -0.388 -0.808 -0.921Japan -0.353 0.284 0.055 -0.014 -0.034 -0.179Canada -0.326 0.182 0.266 0.122 0.148 -0.269Australia -0.256 0.174 0.272 0.190 0.268 0.172Turkey -0.491 0.000 0.283 -0.208 -0.459 -0.717Mexico -0.438 0.153 0.381 0.096 0.106 -0.111Korea -0.422 0.000 0.359 -0.063 -0.115 -0.864Argentina -0.153 0.015 0.192 0.054 0.075 -0.103China -0.412 0.000 1.986 1.574 1.932 1.115India -0.291 0.000 0.310 0.018 0.040 -0.027South Africa -0.145 0.129 0.506 0.490 0.729 0.390
The effect of a simulataneous 1%-point increase on % change in
aggregate demand (including effects of GDPrest of the world
and Pimports)
Global race to the bottom by 1%→ global GDP↓ by 0.36%
Two wage-led recovery scenarios
1. global GDP↑ by 2.81% 2. global GDP↑ by 3.05%
Change in profit share to preserve
the peak wage share
The % change in aggregate demand
(includes national and global multiplier
effects, i.e. changes in Pm and Yrw)
Change in profit share
The % change in aggregate demand
(includes national and global multiplier
effects, i.e. changes in Pm and Yrw)
Euro area-12 -11.05 2.49 -11.05 2.36United Kingdom -7.83 2.01 -7.83 1.91United States -6.31 6.47 -6.31 6.15Japan -16.71 1.77 -16.71 1.49Canada -7.73 2.44 -3.00 2.84Australia -9.02 -1.35 -3.00 0.03Turkey -18.41 11.22 -18.41 10.81Mexico -22.03 -0.56 -3.00 1.45Korea -8.64 7.60 -8.64 7.46Argentina -9.12 0.86 -3.00 1.27China -8.00 -7.44 -1.00 5.56India -15.96 0.05 -3.00 0.43South Africa -13.07 -6.29 -1.00 1.93
Scenario 1 Scenario 2
Planet earth is wage-led!
FT on ↓labour share:”threat to recovery”
“The decline in the labour share, along with a shift of labour income towards higher earners, may be an important part of why the US economic recovery is so sluggish. Workers on lower wages consume much of their income, while higher wage earners and those with capital income are more likely to save.”
Robin Harding, “Pay gap a $740bn threat to US recovery”,
Financial Times, December 14, 2011
Recommended