Recovery Demands Increase in Labour’s Share

The just-released 2011 ILO World of Work Report is a must read for progressive economists.

Released on the eve of the G-20 meetings, the report underlines the gravity of the current global employment situation and warns of the need to put job creation first if we are to avoid a very extended period of high unemployment and rising incidence of precarious work. It emphatically calls for demand side measures to create jobs, along with job friendly labour market policies.

Most important is the theoretical argument and the empirical research which underlies the report. It argues – based on a great deal of new empirical research  – that the way out of the jobs crisis lies in RAISING wages, especially in the economies with large trade surpluses. Moreover,  Chapter 2 documents  the large shift in income from labour to capital in the decade leading up to the crisis, which is mainly attributed to the rising GDP share of financial profits in the advanced economies.

The rise in the profit  share was not accompanied by a rise in real economy job creating capital investment, but rather by increased dividend payouts and accumulation of surplus cash in financial assets. Replicating Jim Stanford’s  important work on the Canadian case, they find that the main drivers of real investment are on the demand side, and that  pro capital policies have not yielded results.

It is argued that higher wages might in fact boost real investment by sustaining and increasing effective global demand and helping resolve global trade imbalances.

In an accompanying editorial, Raymond Torres writes,

“It is time to reconsider “wage moderation” policies. Over the past two decades, the majority of countries have witnessed a decline in the share of income accruing to labour …Nor has wage moderation translated into higher real investment: between 200 and 2009, more than 83% of countries experienced an increase in the share of profits in GDP, but those profits were used increasingly to pay dividends rather than invest. And there is no clear evidence that wage moderation has boosted employment.”

At pages 62-63, it is argued that collective bargaining and minimum wages can help raise the labour share without negatively impacting on employment.

5 comments

  • The wedge between wages and the opportunity cost of labor is still there, meaning unions still create a deadweight loss measured by the surface of the usual Harberger triangle.

  • The purpose of the economy is to serve people, not the other way around. Without unions the ecomony frequently fails to provide jobs at livable wages. It is not unions that should change, but the economy should be changed.

  • Higher wages will have no effect on the BoP via BoT so long as mercantilist countries have other tools at their disposal. One only needs to look at Germany and Japan to verify that. The current acount must be protected by force.

  • In any case, the current issue is far from being opportunity cost. The issue is markets. Doesn’t matter what the cost of labour is if nobody’s buying your product. And guess what, nobody’s buying the product if nobody’s getting paid enough to afford it. That’s why corporations are sitting on tons of uninvested cash–it’s not that the investment opportunities would be there if only they could find a cheap enough workforce, it’s that the investment opportunities would be there if only they paid the workforce enough for markets to exist.

  • Could one of the reason that corporations are sitting on so much cash is to invest it in derivatives and other financializationisms because that is more profitable the investment in real things.

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