Singapore - Work and wages versus wealth and welfare

This should be a sobering statistic: Between the second quarter of 2009 when the United States economy began to recover from the credit crisis, and the first quarter of this year when the revival ran out of steam, 92 per cent of the growth in national income consisted of profits.

What this means is that wage earners were left high and dry.

The recession only aggravated a three-decade trend that led to suppression of wage incomes and a shift in economic power - and political clout - in many nations of the world, both advanced and developing.

Without political commitment to creating new jobs and expanding the share of wage incomes in economic output, there may not be much hope for an enduring revival in global growth.

Copious tears continue to be shed about the trillions of dollars of housing and stock market wealth that were wiped out by the 2008 financial crisis.

But what about the wage income that was permanently lost?

Between 2007 and 2009, about 6.9 million workers in the US were displaced from jobs that they had held for three years or more. Many of these workers are still unemployed, but even those who have found work have done so at much lower wages than before. Each worker displaced by a recession loses US$112,095 in present value of life-time earnings, according to research by Professor Steven Davis of the University of Chicago and Associate Professor Till von Wachter of Columbia University. Multiply 6.9 million by US$112,095 and you're looking at a US$774 billion loss, says a recent Brookings Institution study.

Reinvigorating stagnant wage incomes in advanced nations - and channelling a larger share of productivity growth towards workers' wages in emerging economies - will not be an easy task.

Digitisation has thrown mankind a huge challenge by creating a parallel economy run entirely by machines talking to one another, quickly and accurately performing intelligent tasks that were once the prerogative of human workers, says Professor W. Brian Arthur, a visiting researcher at the Palo Alto Research Centre in California. This "second economy", as he terms it, is making many white-collar service jobs redundant.

"Twenty years ago, if you went into an airport you would walk up to a counter and present paper tickets to a human being. That person would register you on a computer, notify the flight you'd arrived, and check your luggage in. All this was done by humans," he noted in an article he wrote last month in the McKinsey Quarterly. "Today, you walk into an airport and look for a machine. You put in a frequent-flier card or credit card, and it takes just three or four seconds to get back a boarding pass, receipt and luggage tag."

While politicians in advanced economies are quick to blame outsourcing to China and India - and they are especially vocal when they are fighting elections - the insidious attack by servers, switches and routers is an even bigger problem, which goes largely unacknowledged.

The productivity gains that accrue from digitisation largely go towards boosting corporate profitability and do not do much for employment or wages. That is the conclusion Professor Erik Brynjolfsson, an economist at the Massachusetts Institute of Technology (MIT), and Professor Andrew McAfee, an MIT scientist, have reached in their new book, Race Against The Machine, which investigates why US median wages were stagnant in the last decade - and employment fell - despite very strong productivity growth in the economy.

Technology will undoubtedly pose a formidable hurdle to boosting the share of wages in the global economy. But with adequate political resolve, it may not be an insurmountable challenge.

A bigger problem, once a wage-led model of economic growth has been adopted by politicians and policymakers, would be to prevent it from getting hijacked by extreme left-wing, militant trade unionism. The idea is not to give existing workers higher and higher wages that are out of whack with productivity growth. Nor is a return to bloated, paternalistic public sectors the solution.

Such an approach would be inefficient, wasteful and inflationary, and it will create a whole new set of economic woes.

The objective should be to remove bottlenecks to job creation and invest public money in health and education so that more people are employable and have decent work opportunities - provided by private-sector investors who simply have to get used to the idea that profit margins will be nowhere close to what they are today. (Margins are 50 per cent higher than historical norms, according to Cincinnati, Ohio-based hedge fund manager John Hussman.)

In the US, the days when "Americans made a living selling each other houses, paid with money borrowed from China", as Princeton University economist Paul Krugman half-jokingly described the presubprime-crisis economy, are over. And the goal of policy cannot be to somehow resurrect those days of faux prosperity through unbridled monetary expansion. A new blueprint is needed.

The major metropolitan areas in the US will have to reinvent their core economic proposition and focus on serving distinct chunks of specialised global demand. Information technology, in which the US enjoys a competitive advantage worldwide, is a bad example to give today. And that is because of the dysfunctional politics of California, which has led to an orgy of indebtedness. Municipal finances are crumbling in the state and California may have to prune expenditure on schooling to preserve cash. The Silicon Valley miracle is seriously threatened.

Texas, on the other hand, has shown remarkable economic resilience, and not just because it has oil. It is another matter if Texas Governor Rick Perry, a Republican presidential hopeful, can take credit for his state being at the forefront of US employment generation - Texas has added 31 per cent of all non-farm jobs in the country since June 2009. Also, between early 2006 and the first quarter of this year, average private-sector weekly wages in Texas grew 14 per cent, faster than the 11 per cent nationwide expansion in weekly emoluments. The state has undoubtedly done some things right.

At the federal government level, the US should cut payroll taxes and move towards taxing consumption, perhaps through a national sales tax. A cut in payroll taxes - paid by both employees and employers with the revenue used to finance social security payouts - can spur employment and wages.

Europe's case is a complex one. Since the euro came into being, wages have grown faster than productivity in some European countries, such as Italy, and slower in others, notably Germany.

The first set of countries have developed a competitiveness problem. Since being on a common currency means they cannot devalue their exchange rates to become competitive again, they will have to endure painful wage deflation or exit the euro. Neither is a particularly appealing thought. An alternative for them would be to find a way to enhance the productivity of labour through legislative reforms. Meanwhile, Germany will need to allow faster wage growth.

In parts of Latin America and Africa "real wages could be allowed to rise faster than productivity for some time in order to restore the desired income distribution pattern", says a recent study by the United Nations Conference on Trade and Development (Unctad).

Wage shares in the economy need to rise in Asia, too. In China and India, labour productivity grew faster than real wages in the last decade. Whenever that happens, the share of profits in national income rises, and that of wages falls.

Wages accounted for less than 37 per cent of China's gross domestic product in 2005, down from about 57 per cent in 1983.

This trend will probably reverse now as productivity growth slows down even as real wages continue to rise sharply in response to a growing labour shortage and a shift in government policies away from promoting export-led growth.

India's case is even more interesting.

Between 2000 and 2005, net employment in India increased by 93 million; in the following five years, growth in employment slowed to just 2 million, even as economic growth accelerated, according to rating company Crisil. In the absence of job creation, consumption, which powered the economy forward, was spurred by an "extraordinary notional wealth effect due to sharply rising asset/land prices", notes a recent study by Mr Nilesh Jasani, a Singapore-based analyst at the brokerage Jefferies Group.

This wealth effect was compounded by seemingly compassionate but ultimately wrong-headed fiscal policy, such as a government programme that practically gave villagers money for doing very little real work. Such welfare measures have consequences. A recent survey of 30 trucking companies in nine Indian cities by Mr Amit Bhandari of CLSA showed that for 77 per cent of them, a shortage of drivers is a key worry. Part of the problem, Mr Bhandari says, is "improved economic prospects in villages".

Politicians and policymakers around the world have done a great disservice to people by making them increasingly dependent on wealth and welfare. These two 'Ws' now need to be supplanted by two better ones: work and wages.

The first task for political leaders is to convince financial markets that there will not be a repeat of the 2008 crisis. Even as they tend to this immediate goal, they must not lose sight of the imperative to rekindle growth that can sustain.

No one should be surprised that consumer spending in advanced economies is taking so painfully long to recover from the 2008 crisis. High household indebtedness is partly to blame, but "a major reason is that consumers do not expect their incomes to rise consistently over the medium term", Unctad notes in its report this year on trade and development.

"In Europe, Japan and the United States, the current recovery is characterised not only by jobless growth - a feature common to previous recoveries - but also by stagnating wages, which hitherto had been a phenomenon observed mainly in Japan."

For the global economy to be on a stable footing again, wages must be accorded the primacy they deserve. Politicians have their task cut out for them.

Andy Mukherjee

The Straits Times

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