Time to give workers bigger slice of the pie

Nov 10, 2011

Commentary
G-20 leaders must set figures for wage rises in order to boost growth

 By Andy Mukherjee

IN THE middle of yet another nerve-racking week in the markets, with the epicentre of the European crisis seemingly having shifted to Italy from Greece, it is legitimate for investors to ask what, if anything, politicians are doing.

Now, at least one politician did do something good this week - Italian Prime Minister Silvio Berlusconi promised to step down. That gave a faint glimmer of hope to investors yesterday, though it is not clear just how Rome - with or without Mr Berlusconi - will be able to make a dent in the country's staggering debt burden, which at €1.9 trillion (S$3.3 trillion) is 119 per cent of its gross domestic product.

As the world heads towards another 2008-type crisis, there is talk that the International Monetary Fund's (IMF) resources will be expanded - at a future date. There is also expectation that the European Financial Stability Facility, Europe's bailout fund, will be ramped up - at a future date.

Investors are justifiably angry with world leaders for not presenting a clear battle plan at the recently concluded Group of 20 (G-20) summit in Cannes, France.

Still, I would argue that it would be a mistake to view the shindig as a complete failure. Take, for instance, the Cannes Action Plan for Growth and Jobs, through which the leaders made a commitment to implement 'structural reforms to raise growth and enhance job creation across G-20 members'. The 'ultimate objective', they declared, 'is to provide more and better jobs for our citizens'.

Now, it is admittedly a vague commitment. The investor community, which has very little faith left in the ability of present-day politicians to do much good, will not get excited about what they see as yet another platitudinous statement. But then, most political commitments of far-reaching significance begin life this way - as nebulous ideas. It is now up to the technocrats in each country, and at multilateral agencies such as the IMF and the International Labour Organisation (ILO), to flesh out the political intent into specific, time-bound commitments.

One such commitment on which urgent political consensus is needed is wage-led growth.

The average real, or inflation-adjusted, annual wage growth in G-20 economies in 2006 and 2007, the two years preceding the global crisis, was a lacklustre 2.5 per cent and 2.8 per cent respectively. If you take China out of the picture, the reality was even grimmer. For G-20 excluding China, real wages rose just 1.6 per cent and 1.8 per cent in 2006 and 2007.

The 2008 crisis was a hard blow to taxpayers, who had to pony up the resources for the cleaning-up of the mess left by irresponsible bankers. But the crisis also delivered a knock-out punch to labour. Real wage growth in G-20 excluding China collapsed to just 0.5 per cent in 2008, and it rose no faster than that in 2009.

One does not have to be a card-carrying communist to share the rage of the Occupy Wall Street protesters against this assault on the working class.

In formulating its action plan on jobs, the G-20 has taken an important first step. The next step should be for the G-20 leaders to adopt - and announce - simple numerical targets for what the wage share in each of their economies should be by the end of the present decade. No one number will fit all. But the targets have to be worked out in a way that, on average, a large share of economic output of G-20 gets paid out to workers as wages.

A commitment to wage-led growth will be a powerful signal to consumers to start spending again.

Before the onset of the 2008 crisis, conventional economic wisdom de-emphasised wages and promoted profits. One of the central tenets of this orthodoxy was that policymakers must insist on wage moderation because if they did not, there would be too much inflation.

This view found ready acceptance among policymakers as the world was in no mood to relive the inflationary 1970s.

Promoting profits at the expense of wages, it was believed, was a much better growth strategy. The assumption was that higher corporate profits would lead to higher investments, which will, in turn, produce economic growth, create jobs, and bolster government revenue.

Consumption, the spin doctors said, would be supported not by current wage incomes, which were largely stagnant, but by wealth.

For a while, it was possible to do this. Household ownership of financial products was rising globally. So even a part of the middle class, which would have liked to see its wage income rise, got hoodwinked by bankers into accepting the notion that it could always consume a part of its illusory stock-market and real-estate riches. According to an ILO study, between 1980 and 2007, in 17 out of 24 of the world's richest nations that belong to the Organisation for Economic Cooperation and Development (OECD) and for which data is available, the share of wages in the economy fell.

Not that developing countries were spared. Between 2000 and 2009, real wages in China grew 12.6 per cent a year, but productivity grew faster at 13.7 per cent. As a result, the share of wages in gross domestic product fell 4 per cent annually. The yearly decline in wage share in India was 1.4 per cent.

The slavish pursuit of wealth-oriented growth sowed the seeds of the 2008 financial crisis, which brought the whole edifice crumbling down.

The wealth that was supposed to have paid for current consumption simply vanished into thin air. After governments were forced to assume the liabilities of a troubled banking sector to get credit flowing again, they discovered that their budgets were overstretched and no longer capable of supporting the vast social safety nets that they had put in place.

The folly of systematic suppression of wages became all too apparent.

It is time for course correction, which can only happen if G-20 leaders eschew the doctrine that got much of the world into this mess, and give a strong push towards wage-led growth.

andym@sph.com.sg