This thinking guides policies across the world which promote wage moderation. The main premise of these policies is to treat wages as a cost item.
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However, wages play a dual role in the economy: rising wages are both a cost to employers and a potential source for new sales. Consumption is modelled as a function of wage and profit income, and is expected to decrease when the wage share decreases. Therefore, a decrease in the wage share decreases household consumption, which leads to a decline in the demand for goods and ultimately affects investment of the firms. Investment is estimated as a function of the profit share as well as demand: higher profitability is expected to stimulate investment for a given level of aggregate demand.
Finally, exports and imports are estimated as functions of relative prices, which in turn are functions of nominal unit labour costs, closely related to the wage share. The total effect of the decrease in the wage share on aggregate demand depends on the relative size of the reactions of consumption, investment and net exports.
Whether the negative effect of a lower wage share on consumption or the positive effect on investment and net exports is larger is an empirical question that depends on the structure of an economy, such as the difference in the propensity to consume out of wage and profit income, the sensitivity of investment to sales vs. Based on their global model, Onaran and Galanis ibid. A simultaneous wage cut in a highly integrated global economy leaves most countries with only the negative domestic demand effects, and the global economy contracts.
At the global level, Onaran and Galanis ibid. Australia, South Africa and China are the only countries that can continue to grow despite a simultaneous decline in the wage share. Onaran and Galanis ibid. Onaran, Oyvat and Fotopoulou forthcoming find that a higher degree of gender equality in wages and employment that is, an increase in the female wage share in national income leads to higher growth in the UK.
What are the development policy implications of these findings? There is room for policies to decrease income inequality without hurting the growth potential of the economies. The positive effects of higher wages on demand are encouraging in the sense that equality is not an impediment to growth.
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However, the magnitude of the positive effects is economically small, particularly if implemented in only one country. Elsewhere Onaran, I have presented the effects of a coordinated mix of policies in the G20 targeted to increase the share of wages in GDP over the next five years by 1—5 percentage points, depending on the country, and to raise public investment in social and physical infrastructure by 1 per cent of GDP in each country.
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L20 brings together trade unions from the G20 countries. The impact of the increase in the wage share on growth varies in different countries according to the structure of their economies, notably their investment, and export and import shares. The proposed policy mix takes account of this by proposing differential increases in the wage share in GDP of between 1 and 5 percentage points according to the country over five years.
Finally, in the third group, a modest increase in the wage share by 1 per cent of GDP in China, South Africa and Australia can be pursued as part of a coordinated policy package. In this last group, the effect of a rise in the wage share would have a more substantial impact on net exports, which at first sight would limit the policy space for wage increases.
This would help develop a more diversified economic structure, and thereby improve the potential for higher increases in living standards in the future. The results for the G20 show that over a period of five years, an increase in the wage share by 1—5 percentage points in all G20 economies and a simultaneous increase in public investment by 1 per cent of GDP in each country could lead to GDP increases of 3. The effects of both wage and fiscal policies are stronger if policies are implemented simultaneously in a large block due to strong positive spillover effects on demand.
Obst, Onaran and Nikolaidi take this analysis further by estimating the impact of a coordinated policy mix of a simultaneous increase in public investment by 1 per cent of GDP, along with more progressive taxation increasing the effective tax burden on capital by 1 per cent and decreasing the tax burden on labour by 1 per cent , and an increase in the wage share by 1 per cent of GDP in the EU The result is 6. Private investment also increases by 2. Despite the rise in public spending, the budget balance in Europe as a whole improves by 0.
19.1 Inequality across the world and over time
Growth, private investment and budget balance improve both in the periphery and in the core countries of Europe. Hence, expansionary fiscal policy is sustainable when wage and public spending policies are combined with progressive tax policy; the impact is stronger when these policies are implemented in a coordinated fashion. However, like Horner and Hulme this issue , the IMF's focus is on personal income distribution, neglecting the inequality between labour and capital. Neoliberal policies consider public spending as undesirable, even when financed by increased taxation, based on the myth that it leads to low private investment and low productivity in the long run.
The multiplier effects of higher public spending, that is, the effects on GDP, are higher in the long run than in the short run. This is because, in the short term, the economy benefits from only the demand effects; productivity gains kick in only in the long term, further increasing profitability and stimulating investment and demand.
Hence, we need to return to fiscal policy to make sure that demand is consistent with full employment. Additionally, to maintain high employment along with increasing productivity, policies to reduce weekly working hours and cut historical rates of productivity growth are the key for equitable development. The consequences of shorter working hours for equality are twofold.
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First, shorter hours — if implemented with wage compensation for lower wage earners which means an increase in their hourly wages — would entail a narrowing of wage gaps, including gender gaps. Second, a real shortening of working hours should help address domestic care needs and enable a better work—life balance with greater gender equality. These findings have important policy implications if global development is to address some urgent, destabilizing economic and social issues in the world such as stagnation in productivity, unemployment, unhealthy growth driven by private debt, or demographic and care crises.
An appropriate mix of labour market and fiscal policies tackling the multiple dimensions of inequalities can help to achieve a stable macroeconomic environment and genuine convergence. This contribution has built on previous empirical research to conclude that increasing equality would lead to higher global growth and, when mixed with adequate public investment policies, higher employment and human development.
Changes in institutions and the bargaining power between capital and labour have been crucial in determining the fall in the wage share globally.
Without acknowledging this global race to the bottom and its vicious consequences for development and stability, it is not possible to develop a comprehensive policy framework for global development. Rising inequality is not an unavoidable consequence of technological change and globalization. In particular, evidence of the negative impact of global value chains in both advanced and emerging economies has important policy implications, hinting at the importance of international coordination of labour unions and international organizations in creating a level playing field and achieving international labour standards across global value chains, to rebalance the bargaining relations between labour and multinational corporations Onaran and Guschanski, Bargaining institutions and policies can offset the negative impact of technological change and globalization on inequality and are key to reversing the global race to the bottom.
This leaves policy makers with an agnostic and fatalistic understanding of the impact of technology and globalization. At the bottom of the distribution pyramid, increasing statutory minimum wages and putting processes in place for the incremental increase of those minimum wages to the level of a living wage are crucial; this process can be facilitated further through the use of public contracts.
All these labour market policies are more effective if they are embedded in macroeconomic policies aimed at ensuring full employment in order to rebalance both power relations and the structure of the economy. The role of public investment for human development is remarkably notable by its absence, both in the global development debate and in the piece by Horner and Hulme. Rebalancing growth via increasing equality and domestic demand in the emerging economies would also help to address global imbalances. However, this rebalancing can only take place in an international environment where the advanced countries not only leave space for developmentalist policies, and support technology transfer, but also create an expansionary global environment.
‘We Need a New Vision in Development’
While a coordinated global boost to wages might seem like wishful thinking, it is within the power of the advanced economies. The exact opposite has been happening in the last four decades of converging divergence between labour and capital globally, largely following coordinated policies by international institutions such as the IMF, the World Bank or the EC.
Mexico and Brazil in this period thus also illustrate the simple relationship between pay inequality in industry and the rate of economic growth. When growth fell short of that threshold, inequality tended to increase.
New Aspects in an Old Debate
Figure 6 illustrates this relationship with annual data for the two countries. For countries in this situation, coping with rising inequality is largely a matter of restoring internal growth so that the absorption of a growing labour force can resume. But it must also be, partly, a matter of more stable global financial governance, so long as the country remains exposed to external shocks. Note: the figures illustrate the strong negative relationship between growth and inequality in two important middle-income countries.
Vertical unit: percentage change in GDP. Inequality calculations from national data sets. Source: Calmon et al. The case of the Russian Federation was closely analysed via a data set for the years — developed by Krytynskaia from original sources in Goskomstat and reported on in Galbraith et al. The dramatic increase came in , with the implementation of shock therapy, led by price liberalization.
It resulted in a massive collapse of the relative position both of farmers and manufacturing workers, as well as of the non-commercial sectors, such as health and education, previously supported by the state. In their place rise the leading sectors of the new Russia: energy and finance, and the city of Moscow as a world city in a country otherwise mired in post-communist depression.
Inequality, Economic Growth, and Technological Change
This situation became so extreme that by the end of the century, the lightly populated West Siberian oil-and-gas regions of Tiumen and Khanty-Mansy had become major sources of the inequality of Russian incomes generally, while the conflict regions of the southern Caucasus had fallen far below the rest of the country in reported relative income. In the USA, pay inequality in manufacturing rose under the demand shock of tight monetary policy and a high dollar in the early s—a classic backward movement on a downward-sloping Kuznets curve.
This movement was repeated in the recession of the late s. Inequality in pay, particularly within manufacturing, then declined through much of the following decade, as the economy recovered and eventually reached full employment. Figure 7 illustrates the close relationship between inequality in the structure of manufacturing pay, in the USA, and the rate of open unemployment. Note: the movement of pay inequality in manufacturing and of the open unemployment rate are closely associated in the USA, probably for the simple reason that weekly hours and earnings are more variable and strongly pro-cyclical for lower paid workers.
Recessions are indicated by grey lines. As Figure 7 shows, pay inequality in the USA declined through the end of the millennium. Income inequality did not; indeed income inequality rose notoriously in the boom years. The two measures can be reconciled by noting that income includes a large component not derived from work, but rather drawn directly or indirectly from the capital markets: stock options, capital gains and also the salaries paid to executives in firms financed in the start-up phase from equity issuance rather than cash flow.
It would therefore not be surprising to find a relationship between income inequality and asset prices as measured on the capital markets. In the last few years of the millennium, rapid growth driven by the technology bubble produced increasing income inequality in America. This was a move up an upward-sloping segment of the Kuznets curve, onto which the USA had stumbled in the transition to an economy largely centred on technology and finance. Geographically, this increase was exceptionally concentrated.
Removing the income growth of just 15 counties of neutralizes the entire increase in inequality between counties.