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Queueing for Soup in 1931 - courtesy of Al Capone

At the end of 1930, Al Capone opened a soup kitchen serving three free meals a day for people who were made unemployed by the Depression. According to one of Capone’s biographers, Laurence Bergreen, “The soup kitchen was carefully calculated to rehabilitate his image and to ingratiate himself with the workingman, who, he realized, had come to regard him as another unimaginably wealthy and powerful tycoon”

We all know that inequality has been increasing… pretty much everywhere in the world: that even if the poor are not all getting poorer, well the very rich are getting significantly richer faster than anyone else.  What surprises most people is by just how much the gap has widened… and just how much the very very very rich have, whether in wealth or income. For example according to Picketty and Saetz, the sages on the matter, the 0.01% with the highest income in the US had an average income of close to $24 million in 2011. That group’s share of total income rose from 0.5% in 1973 to 3.2% in 2011, and the lowest paid of the 15,837 families concerned received just under $8 million.  Probably the best known graphic is the one immediately below, illustrating how the US plutocracy is back to the commanding heights which it dominated towards the beginning of the last century and until the start of that great depression:

130618 - Top 10% Pre-tax Income Share in the US, 1917-2011

But we would be mistaken if we think that this resurgence is uniquely an US phenomenon.  Or that inequality is at its worst in the US, as the CIA map below indicates:

130618 - CIA GINI Map 2009

The US may be in the same range as China or Argentina, but it is not as bad a Brazil.  Noticeable however is just HOW much greater equality[1] is in the other Anglo-Saxon countries (Canada, Australia, the UK), and throughout Western Europe.

But the ILO[2] Global Wage Report 2012-3 out recently highlights that the share of national income (or GDP) that is going to labour (i.e. to workers) has been steadily dropping, pretty much everywhere.  For example the OECD has found that in the 20 years between from 1990 to it declined in 26 out of 30 devel­oped economies for which data were available, dropping from 66.1 per cent to 61.7 per cent.  The decrease in developing and emerging economies was even steeper (as illustrated below).  And all of this was taking place as labour productivity was increasing.  In fact according to the ILO, “between 1999 and 2011 average labour productivity in developed economies increased more than twice as much as average wages”[3]. Productivity in the US has increased by 85% since 1980: in the same time real hourly wages have increased by merely 35%.

Adjusted labour income shares in developing and emerging economies, 1970–2007

130618 - Adjusted labour income shares in developing and emerging economies, 1970–2007

There are a number of key points to be noted here. First the trend is across all industries, so this is not the result of a move to industries that are more capital-intensive. And that this trend is not specially localised: it seems pretty global. So it probably isn’t the result of specific local policies. Nor is it limited to developed countries: emerging/developing ones are just as bad.

The ILO thinks that “the drop in the labour share is due to technological progress, trade globalization, the expansion of financial markets, and decreasing union density, which have eroded the bargaining power of labour. Financial globalization.. .. may have played a bigger role than previously thought.” In particular, the globalisation of trade has increased the pressure on the competitiveness of a country’s exports, which itself puts a downward pressure on the wages of those producing the exports.

But the most interesting aspect of the ILO’s tentative explanations for the trend is that it mentions both trade and financial globalisation, but it does not mention the missing elephant in the room: which is the lack of labour globalisation.  We have known that free trade is a win/win since the days of Ricardo… but we seem to have forgotten that it has been shown to be a win/win only if we constrain both capital flows and labour flows[4], and these days we have liberalised capital flows, but not labour flows: immigration is pretty controlled everywhere on earth.

There is of course also the question of distributing the gains in labour productivity more fairly, which would go a long way to rectifying the situation.  But what is clear is that if we let this trend continue, then we are simply impoverishing ourselves: in a forthcoming paper Onaran and Galanis of the ILO show that over a range of 15 countries and the Eurozone, a 1% drop in the share of national income going to labour consistently reduces the rate of private consumption as a % of GDP, and by close to 0.5% in both the US and the Eurozone[5]. The effect of exports is in the opposite direction: they increase, but only for a few countries do they do so by a rate (as a % of GDP) that is greater than the decrease in the local private consumption caused by the same relative decline in wages in the share of the pie.

In other words, it is not by entering into additional export competitiveness that most countries are ever going to grow their way out of this depression.

[1] Note that not everyone thinks that equality is desirable: according to some notorious recent research, “Can’t We All Be More like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World”, the authors argue “that the more harmonious and egalitarian Scandinavian societies are made possible because they are able to benefit from and free-ride on the knowledge externalities created by the cutthroat American equilibrium.” In other words, the Swedes can only afford their egalitarian welfare state because they piggy-back off the innovatory entrepreneurship that stems (uniquely?) from the inequality of US capitalism.

[2] ILO: the International Labour Organization, a UN agency based in Geneva

[5] See Figure A1 on p 91 of the ILO report.