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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