Presentation on theme: "Özlem Onaran University of Greenwich"— Presentation transcript:
1Özlem Onaran University of Greenwich How to achieve a wage-led recovery? The prospects for growth with equality in a globalized economyÖzlem OnaranUniversity of Greenwich
2Different 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 inequalityReal wages increasing at a lower pace than productivitydeclining wage shareGlobal race to the bottom in the wage share in national incomeIn the global north as well as the south since the 1980s
4Wage share in national income (1960-2013) Global NorthWage share in national income ( )*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: AMECO
5Wage share in national income (1970=100) Global SouthWage share in national income (1970=100)*Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
7Why is capital’s victory empty? Financial Times on 2013, Hermes Investment ConferenceSession: “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 membersThe 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)
8What is the problem? Effect of increasing profit share on growth? Mainstreamwage=costpositive effect on investmentPositive effect on exportsPuzzle: 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 wagesCost itemSource of domestic demand
9Lower share of wages in national income (higher profit share) lower domestic consumptionThe poor consume more out of their income than the richWorkers consume a higher proportion of their wages than the capitalists consume out of their profits2. A positive effect on private investment but only partialInvestment depends on profitability, but also demand3. higher foreign demand (Net exports=Exports-Imports)labour costs ↓ higher international competitivenessif total effect is -: lower wage share lower growth, fewer jobsthe economy is wage-ledif total effect is +: lower wage share higher growththe economy is profit-ledMainstream policies assume all our countries, and the world as a whole is profit-led, and claim that we need wage moderation for higher employment
10Inconsistency of the Macro vs. Micro rationale Firm vs. aggregate/nationalNational vs. regional/global level→race to the bottom in labour shareinternational competitiveness effects are eliminatedmakes economies more likely to be wage-led
11What 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-ledNet 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-ledGlobal race to the bottom: a 1%-point fall in the wage shareglobal 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!
12How did the world grow despite declining wage share until the Great Recession? Potential crisis of demand deficiencyThe expected outcome should have been a stagnation of global demand and growthThis was mainly circumvented by two distinct growth modelsa root cause of the great recessionFragile → Great Recession
13Policy Lessonsthe 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 coordinationavoid beggar thy neighbor policiesRecovery led by domestic demand & ↑ in the wage sharea reversal of the ↑ inequality –a factor behind the crisis+political and economic stability
14How to achieve a wage-led recovery? Fall in the labour share is not an inevitable outcome of technological change or globalizationIncrease the bargaining power of labourunion legislation,increasing the coverage of collective bargaining,establishing sufficiently high minimum wages,regulating high/executive payBring the welfare state backincreasing the social wage via public goods and social security,Reregulate finance / Reverse financialisationEffects 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
16For 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.
17Wage share in national income (1960=100) *Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
18Wage share in national income (1970=100) *Adjusted labour share= compensation per employee*Total employment/GDP at factor costSource: Onaran and Galanis 2012
19Wage share vs. growth, EU15, 1960-2013 Wage share declined further in , pay freeze and austerity→the biggest treat to recovery!
20→globally lower growth, fewer and/or more precarious job creation Average growth of GDP (%)
21Global race to the bottom by 1%→ global GDP↓ by 0.36% Source: Onaran and Galanis 2012
22Two wage-led recovery scenarios 1. global GDP↑ by 2.81%2. global GDP↑ by 3.05%Planet earth is wage-led!
23FT 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,