How to achieve shared prosperity even if wages aren't rising
policy-network.net
- April 10th, 2013
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Many of the rich countries, when they return to reasonably robust economic growth, will face two potential obstacles to shared prosperity. One is a shortage of jobs. The other is stagnant (or falling) wages for those in the lower half.
The quantity of jobs is easier to solve, as there is considerable scope for expansion of employment in helping-caring services. These jobs will be valuable to society; we will benefit from having more people educate children, keep us healthy and care for us when we are ill, and give us personalized assistance in transitioning from school to work, switching from one type of work to another in middle age, improving our family life, transitioning into retirement, flourishing during retirement years, and much more. There will be plenty of demand for these services. As we get richer, most of us are happy to outsource tasks that we lack the expertise and/or time to perform ourselves. And we will likely be able to afford them as the cost of food, manufactured items, and possibly also energy falls1.
But some of these jobs, maybe many of them, will be low paying. Moreover, an array of economic shifts coupled with likely weakening of unions and collective bargaining may cause pay for workers in the lower half to stagnate or even decrease. The potential result: a replication of the American experience since the 1970s, featuring decoupling between growth of the economy and growth of household incomes for those in the middle and below (see figure 1). The economy will grow, but little of the gain will trickle down to the bottom half.
Figure 1. Economic growth and household income growth in the United States,
1947-79 versus 1979-2007
1947-79 versus 1979-2007
Each series is displayed as an index set to equal 1 in 1947. Q1, Q2, and Q3 are the first (lowest), second, and third quintiles of the income distribution. Inflation adjustment for each series is via the CPIU- RS. Data sources: Bureau of Economic Analysis; Census Bureau; Congressional Budget Office.
What can we do to ensure that the incomes and living standards of lower-half
households more closely track growth of the economy?
households more closely track growth of the economy?
Strategies unlikely to work
Let me begin with three strategies that are traditional favourites of the left but probably aren’t up to the task.
Reindustrialise
For persons with limited education, a job in manufacturing is one of the few paths to decent and rising pay. Protecting existing manufacturing jobs, bringing back lost ones, and creating new ones is a perennial aim of the left. But possibilities here are limited. As figure 2 shows, manufacturing’s share of employment has been shrinking steadily in all rich nations. (I’ve highlighted Denmark, Germany, and the UK in this and several later charts, purely for illustrative purposes.) There are no exceptions. Even South Korea, which didn’t industrialise until the 1970s and 1980s, has joined the downward march.
For persons with limited education, a job in manufacturing is one of the few paths to decent and rising pay. Protecting existing manufacturing jobs, bringing back lost ones, and creating new ones is a perennial aim of the left. But possibilities here are limited. As figure 2 shows, manufacturing’s share of employment has been shrinking steadily in all rich nations. (I’ve highlighted Denmark, Germany, and the UK in this and several later charts, purely for illustrative purposes.) There are no exceptions. Even South Korea, which didn’t industrialise until the 1970s and 1980s, has joined the downward march.
Figure 2. Manufacturing’s share of employment
Manufacturing employment as a share of total employment. 21 countries. The lines are loess curves. Average in 1979: 23%. Average in 2007: 15%. Data source: OECD.
Figure 3. Manufacturing employment and total employment, 2007
Employment rate: employed persons as a share of the population age 25-64. Data source: OECD.
Like in agriculture, this employment decline is due partly to automation. It owes also, of course, to opportunities for low-cost production in poorer nations. Neither is likely to abate. Two decades from now, manufacturing jobs will have shrunk to less than 10 per cent of employment in most affluent countries.
This is a problem for wages and wage growth, but it is not necessarily an obstacle to high employment. Looking across the rich countries, there is no tendency for those with a larger share of employment in manufacturing to have a higher employment rate, as figure 3 indicates.
Strengthen collective bargaining
Strong labour unions can blunt the downward pressure on wages. For several decades following World War 2, unions ensured that firms passed a healthy portion of profit growth on to employees in the form of pay increases, and that has continued in the countries where unions remain strong.
Strong labour unions can blunt the downward pressure on wages. For several decades following World War 2, unions ensured that firms passed a healthy portion of profit growth on to employees in the form of pay increases, and that has continued in the countries where unions remain strong.
But as figure 4 shows, unionisation has been falling in most affluent nations. Only five now have rates above 40 per cent, and four of those (Belgium, Denmark, Finland, and Sweden) are countries in which access to unemployment insurance is tied to union membership.
Figure 4. Unionisation
Union members as a share of all employees. 20 countries. The lines are loess curves. Data source: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 3, 2011, Amsterdam Institute for Advanced Labour Studies, series ud.
Figure 5. Collective Bargaining Coverage
Share of employees with wages determined by collective agreements. 20 countries. The lines are loess curves. Data source: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 3, 2011, Amsterdam Institute for Advanced Labour Studies, series adjcov.
Figure 5 shows that despite the near-universal decline in unionisation, collective bargaining coverage has held up in many nations. Will it continue to hold up? That’s difficult to predict, but the German experience is worrisome. It’s a non-Anglo country with a long history of successful pattern bargaining, yet collective agreement coverage has fallen by about 20 percentage points.
Even if there is no further reduction in bargaining coverage going forward, in all but a handful of the rich countries 20 per cent or more of the employed already are outside the reach of collective agreements. And in half of the countries it’s 40 per cent or more. That’s a lot of people facing the prospect of no sustained wage improvement.
Tighten the labour market
Full employment can help push wages up even in an otherwise inhospitable market and institutional context. Indeed, in the United States, an unemployment rate around 4 per cent was the key to the past generation’s one brief period of nontrivial wage growth – the late 1990s. But monetary authorities aren’t likely to cooperate, particularly given that monetary accommodation is widely thought to have contributed to the housing bubble and bust that precipitated the 2008 economic crash.
Full employment can help push wages up even in an otherwise inhospitable market and institutional context. Indeed, in the United States, an unemployment rate around 4 per cent was the key to the past generation’s one brief period of nontrivial wage growth – the late 1990s. But monetary authorities aren’t likely to cooperate, particularly given that monetary accommodation is widely thought to have contributed to the housing bubble and bust that precipitated the 2008 economic crash.
More promising routes to lift living standards
Here are four strategies I see as more promising routes to shared prosperity in the new economic context.
Educate
Schooling is not a cure-all. It can’t guarantee high employment, rising wages, broadly shared prosperity, or any other element of a good society. But it helps. The better we do with education, the larger the share of the population who will be able to work in decent-paying analytical professional jobs 4.
Schooling is not a cure-all. It can’t guarantee high employment, rising wages, broadly shared prosperity, or any other element of a good society. But it helps. The better we do with education, the larger the share of the population who will be able to work in decent-paying analytical professional jobs 4.
Public services
Public goods, services, spaces, and mandated free time – from childcare to roads and bridges to health care to holidays and vacations and paid parental leave – increase the sphere of consumption for which the cost to households is zero or minimal. They lift the living standards of households directly and free up income for purchasing other goods and services. Their addition to material well-being doesn’t show up in income statistics, but it’s real nonetheless.
Public goods, services, spaces, and mandated free time – from childcare to roads and bridges to health care to holidays and vacations and paid parental leave – increase the sphere of consumption for which the cost to households is zero or minimal. They lift the living standards of households directly and free up income for purchasing other goods and services. Their addition to material well-being doesn’t show up in income statistics, but it’s real nonetheless.
Universal early education would be a particularly fruitful path to pursue. Denmark and Sweden point the way forward. Danish and Swedish parents can take a paid year off work following the birth of a child. After that, parents can put the child in a public or cooperative early education centre. Early education teachers get training and pay comparable to elementary school teachers. Parents pay a fee, but the cost is capped at around 10% of a household’s income.
Early education has three benefits. First, it facilitates employment of parents, especially mothers, thereby boosting family incomes. In a context of flat or declining wages, adding employment hours is the only way for families to increase their earnings.
Second, early education helps parents balance work and family, which is a quality-of-life improvement in and of itself.
Third, early education enhances capabilities, particularly for those from less advantaged homes. In the Nordic countries, the influence of parents’ education, income, and parenting practices on their children’s cognitive abilities, likelihood of completing high school and college, and labour market success is weaker than elsewhere. Evidence increasingly suggests that the early years are the most important ones for developing cognitive and noncognitive skills, so the Nordic countries’ success in equalising opportunity very likely owes partly, perhaps largely, to early education 5.
A statutory minimum wage that rises with prices
If union decline continues and collective bargaining coverage follows suit, a statutory minimum wage will be needed to secure a decent wage floor. To ensure that the floor rises, the statutory minimum should be tied (indexed) to prices and also periodically adjusted upward in real terms.
If union decline continues and collective bargaining coverage follows suit, a statutory minimum wage will be needed to secure a decent wage floor. To ensure that the floor rises, the statutory minimum should be tied (indexed) to prices and also periodically adjusted upward in real terms.
Though vital, a wage floor is of limited help to many. Its main effect is to compress the bottom of the wage distribution rather than to push up wages for everyone in the lower half 6.
Decoupling insurance
I recommend a government programme that can compensate for stagnant wages in a context of robust economic growth – insurance against decoupling, if you will.7 Countries that already have an employment-conditional earnings subsidy (Earned Income Tax Credit, Universal Credit, etc.) could build on that. The ideal, in my view, would be to make receipt conditional on earnings, give it to everyone with earnings rather than only to those with low income, tax it for households with relatively high income, and index it to average compensation (or perhaps GDP per capita). This would ensure that when the economy grows, household incomes do too.
I recommend a government programme that can compensate for stagnant wages in a context of robust economic growth – insurance against decoupling, if you will.7 Countries that already have an employment-conditional earnings subsidy (Earned Income Tax Credit, Universal Credit, etc.) could build on that. The ideal, in my view, would be to make receipt conditional on earnings, give it to everyone with earnings rather than only to those with low income, tax it for households with relatively high income, and index it to average compensation (or perhaps GDP per capita). This would ensure that when the economy grows, household incomes do too.
Some will ask why taxpayers rather than employers should bear the cost of ensuring that household incomes rise. It’s an understandable sentiment. But consider how we think about health insurance, pensions, unemployment insurance, and sickness/disability insurance. Like income, these contribute to economic security and material well-being. In all affluent nations, they are financed at least partly by taxes or social contributions. Few object to the fact that firms aren’t the sole funders.
Why propose a new (or expanded) government social programme at a moment when economic conditions and political sentiment in many countries militate in favour of spending cuts? First, this is a strategy for the medium- and long run. Second, the logic of public policy as a mechanism to insure against risk remains as compelling as ever. If we want shared prosperity and if markets and institutions no longer can provide it, offering a simple public insurance remedy such as this can be both smart policy and smart politics.
Lane Kenworthy is professor of sociology and political science at the University
of Arizona
of Arizona
Lane Kenworthy will speak at the Policy Network/Global Progress conference on "Progressive Governance: Towards Growth and Shared Prosperity" taking place on the 11th and 12th of April 2013.
1. William J. Baumol, The Cost Disease, Yale University Press, 2012.
2. Jess Bailey, Joe Coward, and Matthew Whittaker, “Painful Separation: An International Study of the Weakening Relationship between Economic Growth and the Pay of Ordinary Workers,” Commission on Living Standards, Resolution Foundation, 2011.
3. Lane Kenworthy, Progress for the Poor, Oxford University Press, 2011; Kenworthy, “When Does
Economic Growth Benefit People on Low-to-Middle Incomes – and Why?” Commission on Living Standards, Resolution Foundation, 2011
Economic Growth Benefit People on Low-to-Middle Incomes – and Why?” Commission on Living Standards, Resolution Foundation, 2011
4. Lane Kenworthy, “Two and a Half Cheers for Education,” pp. 111-123 in After the Third Way: The Future of Social Democracy in Europe, edited by Olaf Cramme and Patrick Diamond, a Policy Network book, I.B. Tauris, 2012.
5. James J. Heckman, “Schools, Skills, and Synapses,” NBER Working Paper 14064, 2008; Christopher Ruhm and Jane Waldfogel, “Long-Term Effects of Early Childcare and Education,” IZA Discussion Paper 6149, 2011; John Ermisch, Markus Jäntti, and Timothy Smeeding, eds., From Parents to Children: The Intergenerational Transmission of Advantage, Russell Sage Foundation, 2012; Gøsta Esping-Andersen and Sandra Wagner, “Asymmetries in the Opportunity Structure: Intergenerational Mobility Trends in Europe,” Research in Social Stratification and Mobility 30: 473-487, 2012.
6. For a useful illustration, see figure 4.12 in Resolution Foundation Commission on Living Standards, Gaining from Growth, 2012.
7. Robert Shiller’s “inequality insurance” proposal is similar in spirit. See Shiller, The New Financial Order, Princeton University Press, 2003, ch. 11. See also Robert B. Reich, Aftershock, Knopf, 2010
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