Download Financialization, income distribution, and aggregate demand in the

How to achieve a wage-led recovery?
The prospects for growth with equality
in a globalized economy
Özlem Onaran
University 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 North
Wage share in national income (1960-2013)
85
80
Euro area -12 countries
75
70
United Kingdom
65
United States
60
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
2012
Japan
55
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: AMECO
Global South
Wage share in national income (1970=100)
120
110
100
Mexico
Korea
90
China
India
South Africa
80
70
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
60
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012
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)
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
8
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 profits
2. A positive effect on private investment but only partial
– Investment depends on profitability, but also demand
3. 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
9
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
Center
Periphery
Debt-led growth
Export-led growth
US, UK, Australia, New Zealand
Germany, Japan, Netherlands,
Norway, Sweden, Austria, Canada,
Finland, Belgium, Denmark
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)
120
115
110
105
Euro area WS
Germany WS
100
France WS
Italy WS
95
United Kingdom WS
United States WS
Japan WS
90
Canada WS
Australia WS
85
80
75
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012
Wage share in national income (1970=100)
120
110
100
Turkey
Mexico
Korea
90
Argentina
China
India
80
South Africa
70
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
60
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012
Wage share vs. growth, EU15, 1960-2013
76
8.00
74
6.00
72
4.00
70
2.00
68
66
0.00
64
-2.00
62
-4.00
60
58
-6.00
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Adjusted wage share/GDP at current factor cost
GDP growth
Wage share declined further in 2010-11, pay freeze and austerity
→the biggest treat to recovery!
→globally lower growth, fewer and/or more precarious job creation
Average growth of GDP (%)
1961-69
1970-79
1980-89
1990-99
2000-07
1970-79
1980-89
1990-99
2000-07
Euro area-12
5.30
3.78
2.27
2.15
2.13
Germany
4.39
3.27
1.96
2.32
1.53
France
5.71
4.15
2.31
1.86
2.10
Turkey Mexico
4.86
6.41
4.08
2.21
4.02
3.38
5.23
3.06
Italy
5.77
4.02
2.55
1.43
1.46
UK
2.90
2.42
2.48
2.24
2.73
US
4.69
3.32
3.04
3.21
2.61
Korea Argentina China
10.27
2.92
6.11
8.62
-0.73
9.75
6.68
4.52
9.99
5.20
3.51
10.51
Japan Canada Australia
10.14 5.37 5.53
5.21 4.11 3.07
4.37 3.04 3.35
1.46 2.44 3.32
1.73 2.92 3.31
India
2.68
5.69
5.63
7.26
South Africa
3.03
2.24
1.39
4.30
The effect of a
simulataneous 1%-point
increase on % change in
aggregate demand
(including effects of
% change in aggregate GDPrest of the world
demand (D*multiplier)
and Pimports)
E
G
-0.133
-0.245
-0.031
-0.027
-0.173
-0.030
-0.214
-0.808
-0.921
-0.034
-0.179
0.148
-0.269
0.268
0.172
-0.459
-0.717
0.106
-0.111
-0.115
-0.864
0.075
-0.103
1.932
1.115
0.040
-0.027
0.729
0.390
The effect of a 1%-point increase in the profit share in only one country on
Net
Consumption Investment/ exports/ Initial change in private
/GDP
GDP
GDP
demand/GDP
A
B
C
D (A+B+C)
Euro area-12
-0.439
0.299
0.057
-0.084
Germany
-0.501
0.376
0.096
-0.029
France
-0.305
0.088
0.198
-0.020
Italy
-0.356
0.130
0.126
-0.100
United Kingdom
-0.303
0.120
0.158
-0.025
United States
-0.426
0.000
0.037
-0.388
Japan
-0.353
0.284
0.055
-0.014
Canada
-0.326
0.182
0.266
0.122
Australia
-0.256
0.174
0.272
0.190
Turkey
-0.491
0.000
0.283
-0.208
Mexico
-0.438
0.153
0.381
0.096
Korea
-0.422
0.000
0.359
-0.063
Argentina
-0.153
0.015
0.192
0.054
China
-0.412
0.000
1.986
1.574
India
-0.291
0.000
0.310
0.018
South Africa
-0.145
0.129
0.506
0.490
Global race to the bottom by 1%→ global GDP↓ by 0.36%
Source: Onaran and Galanis 2012
Two wage-led recovery scenarios
Euro area-12
United Kingdom
United States
Japan
Canada
Australia
Turkey
Mexico
Korea
Argentina
China
India
South Africa
Scenario 1
The % change in
aggregate demand
Change in profit
(includes national and
share to preserve
global multiplier
the peak wage
effects, i.e. changes in
share
Pm and Yrw)
-11.05
2.49
-7.83
2.01
-6.31
6.47
-16.71
1.77
-7.73
2.44
-9.02
-1.35
-18.41
11.22
-22.03
-0.56
-8.64
7.60
-9.12
0.86
-8.00
-7.44
-15.96
0.05
-13.07
-6.29
1. global GDP↑ by 2.81%
Planet earth is wage-led!
Scenario 2
The % change in
aggregate demand
(includes national and
global multiplier
Change in profit effects, i.e. changes in
share
Pm and Yrw)
-11.05
2.36
-7.83
1.91
-6.31
6.15
-16.71
1.49
-3.00
2.84
-3.00
0.03
-18.41
10.81
-3.00
1.45
-8.64
7.46
-3.00
1.27
-1.00
5.56
-3.00
0.43
-1.00
1.93
2. global GDP↑ by 3.05%
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