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ILO: Wage Growth is a Global Macroeconomic Problem

December 8th, 2012
in econ_news, syndication

rock-hard-place-SMALLEconintersect: Wage growth is increasingly failing to keep up with productivity growth, income disparity is continuing to increase and labor share of income relative to capital is decreasing. These are the summary conclusions of the 2012-13 edition of the Global Wage Report from the ILO (International Labor Organization). The ILO report suggests that the current trends are economically unsustainable and pose social problems as well.

Follow up:

Key data summaries from the report:

  1. Global monthly wages grew by 1.2 % in 2011, down from 3 % in 2007 and 2.1 % in 2010.
  2. Wage growth suffered a double-dip in developed economies where it is forecast at zero per cent in 2012.
  3. Throughout the crisis wages continued to grow in Latin America and the Caribbean, Africa and Asia.

According to the ILO report, the factors that are driving the current trends direction include increasing financial and trade globalization to advances in technology and the decline in union density. Of these, the advances in technology and automation have specifically been discussed recently in an GEI Analysis article by Steven Hansen. The ultimate point of unsustainability for productivity improvement through automation was characterized with a hypothetical situation:

If a machine was invented to replace every person but one in the USA – productivity would skyrocket but does anyone think GDP would skyrocket?

Hansen goes on to elaborate on the problem:

....productivity does not directly effect worker’s earnings, and may even lead to a decline in the number of human workers. What is being missed in the discussion of productivity relating to GDP is standard of living. This transcends productivity; productivity is a subset of the standard of living universe. When increased productivity accrues benefit unequally across a society, as has happened over some long periods of time, median standard of living can degrade, even when average does not. The standard of living should correlate in some manner with consumption, and the median standard of living should be a function of income distribution.

The following video made by ILO economist Patrick Belser addresses the same concerns.

wages-and-productivity-ilo

The wide disparity in average wage across the world is presented in the following graphic from the report:

Click on graphic for larger image.

wages-by-country-ilo-580px

The following graph shows the 40-year recent history of labor share of income. For the 16 high-income OECD countries the decline from the peak in the mid-1970s to 2011 is 11%; for the U.S. and Germany the decline is 12%; and for Japan, 19%. In this data the top 1% of wage earners are excluded to provide the adjusted labor income.

Click on graph for larger image.

labor-share-of-income-ilo-580px

The decline appears even greater from 1970 to 2011 for emerging and developing countries. For the group of three countries (Mexico, South Korea and Turkey) the decline is 26%. For the years where data is available the graph shows that the larger groups of countries showed closely parallel data.

Click on graph for larger image.

labor-share-of-income-wo-top-1-percent-ilo-580px

Even in China where wages have tripled over the last decade the total (unadjusted) labor share of income has declined from 64% to 47% between 1992 and 2008. That is a 27% decline!

The ILO report discusses the divergent paths of skilled labor compensation:

The International Institute for Labour Studies (IILS, 2011) calculated, for example, that in the ten developed economies for which data were available the wage share fell by 12 percentage points for low-skilled workers between the early 1980s and 2005, while it increased by 7 percentage points for highly skilled workers. Similarly, the IMF found that between 1980 and 2005 the labour share of unskilled workers fell in the United States, Japan and Europe (by 15 per cent, 15 per cent and 10 per cent respectively), but increased for skilled workers educated to tertiary level and above (by 7 per cent, 2 per cent and 8 per cent respectively) (IMF, 2007).

The ILO report places emphasis on the role of finance on the trends observed, citing "the increasing role of financial motives, financial actors and financial institutions in the operation of domestic and international economies (Epstein, 2005)."

Here is another excerpt which cites a second IILS report:

A report by the IILS found that the international integration of financial markets has been a major driver of falling wage shares, at least in advanced economies (IILS, 2011). The switch in the 1980s to corporate governance systems based on maximizing shareholder value and the rise of aggressive returns-oriented institutions, including private equity funds, hedge funds and institutional investors, put pressure on firms to increase profits , especially in the short term (Rossmann, 2009; Lazonick and O’Sullivan, 2000; Stockhammer, 2004; see also IILS, 2008; Hein and Schoder, 2011; Argitis and Pitelis, 2001). In addition, as pointed out above, financial globalization has probably weakened workers’ bargaining position (Rodrik, 1997; Onaran, 2011). Some groups of workers, particularly top executives, may have benefited from this process of “financialization” through deferred salaries in the form of pension funds and other types of capital gains. For the average worker, though, the evidence indicates that the extent and size of such gains are much more limited.

The new report by the ILO relates to a working paper posted by John Lounsbury last year at GEI Analysis, studying the relationships between return to labor and return to capital in the U.S. over the past 50 years. The following graph shows that the changes from the 1970s to date studied by the ILO are not changes from a one time peak in the 1970s, but they are changes from an established norm.

The following graph from the same Lounsbury study shows that there was a clear change in trend between 1978 and 1982 from a distribution of returns growing in labor's favor relative to capital to the reverse which may have been ended by the end of the dot.com bubble. COE is Compensation of Employees, Wages and Salaries.

compensation-of-employees-vs-sp-500

 

The new report by the ILO shows that the macroeconomies of labor and capital have truly been globalized. The global uniformity can be seen in the divergence of corporate cash holdings from investment in the 21st century in all parts of the world except for Latin America. The following graph for the U.S. is representative (from International Institute for Labour Studies, 2012):

cash-holdings-vs-investment-us-iils

This graph is representative of the problem discussed by Lounsury's analysis in 2011, which he whimsically titled "Private Investment: Between a Rock and a Hard Place" - corporations have ever increasing amounts of cash and don't know what to do with it.

Corporations feel caught in a dichotomy between investing in labor and investing in capital improvements. The former (investing in more labor) risks accepting productivity burdens with loss of business to competitors who do not make such investments - and therefore achieve a lower production cost. The latter risks increasing production capacity but not doing anything to increase market (machines are not consumers) - and thus increasing production for a market that is not increasing consumption.

And that describes a rock and a hard place.

John Lounsbury

Sources:









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