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