The shift from wages to profits, and what to do about it

The impact of the shift from wages to profits, and what to do about it, is covered in a new booklet by Professor Özlem Onaran, 'State intervention for wage-led development', published by Class.

She explains that the reversal of the trend towards relatively egalitarian income distribution achieved during the post-war period, is associated with a weaker and more volatile growth performance. In order to maintain consumption levels in the absence of decent wage increases households turned to debt and that contributed to the Great Recession. The recovery in Britain is built once again on the shaky ground of household debt instead of wage growth.

What really caught my eye was her concise explanation of the link between wages and the economy. It's worth repeating in full:

"Empirical evidence shows that when the share of wages in national income decreases four things happen. First, consumption decreases, since workers consume more as a proportion of their income compared to the owners of capital; hence when there is a redistribution from wages to profits, domestic consumption in the national economy unambiguously decreases. Second, although private investment may increase due to higher profits, this increase is insufficient to offset the negative effects on domestic consumption. Third, net exports (exports minus imports) increase due to a fall in unit labour costs, but in the majority of countries this increase is not enough to offset the negative effect on domestic demand. Finally, in an environment of the global race to the bottom in the wage share, most of the positive effects on net exports are wiped out as labour costs fall simultaneously in all countries, and their international competitiveness relative to each other does not change significantly. Thus, in the vast majority of countries a fall in the wage share leads to lower growth; this is what we call a wage-led growth economy. The UK is a typical example of a wage-led economy."

Bite sized economics at its best!

She then sets out a strategy of wage-led development with a policy mix that includes labour market policies aiming at pre-distribution, as well as redistributive policies through progressive taxation. Specific recommendations include; Strengthening collective bargaining, increasing the minimum wage, enforcing pay ratios, ending public sector pay freezes and restoring progressivity into the tax system.

Well worth a read.

 

Posted with Blogsy