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Özlem Onaran University of Greenwich

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“

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Özlem Onaran University of Greenwich

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  1. How to achieve a wage-led recovery? The prospects for growth with equality in a globalized economy Özlem Onaran University of Greenwich

  2. 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

  3. Broken linkage between wages and productivity

  4. Global North Wage share in national income (1960-2013) • *Adjusted labour share= compensation per employee*Total employment/GDP at factor cost • Source: AMECO

  5. Global South Wage share in national income (1970=100) • *Adjusted labour share= compensation per employee*Total employment/GDP at factor cost • Source: Onaran and Galanis 2012

  6. 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)

  7. 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)  • 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 onlypartial • 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

  10. 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!

  11. 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 • Fragile → Great Recession 2008-2013

  12. 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

  13. 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

  14. How to close the jobs gap?

  15. 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

  16. Wage share in national income (1960=100) • *Adjusted labour share= compensation per employee*Total employment/GDP at factor cost • Source: Onaran and Galanis 2012

  17. Wage share in national income (1970=100) • *Adjusted labour share= compensation per employee*Total employment/GDP at factor cost • Source: Onaran and Galanis 2012

  18. Wage share vs. growth, EU15, 1960-2013 Wage share declined further in 2010-11, pay freeze and austerity →the biggest treat to recovery!

  19. →globally lower growth, fewer and/or more precarious job creation Average growth of GDP (%)

  20. Global race to the bottom by 1%→ global GDP↓ by 0.36% Source: Onaran and Galanis 2012

  21. Two wage-led recovery scenarios 1. global GDP↑ by 2.81% 2. global GDP↑ by 3.05% Planet earth is wage-led!

  22. 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

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