Why the World Needs a Pay Raise

By Stewart LansleyMarch 15, 2014

Why the World Needs a Pay Raise

PRESIDENT OBAMA HAS LONG pledged to focus his final term in office to tackling the growing gap between rich and poor, an issue he has repeatedly called “the defining issue of our time.” The president is to meet with Pope Francis — who has made similar denunciations of income inequality — on March 27 in what has been dubbed the “inequality summit.” In the last year, the political momentum against the chronic and growing income gap has certainly been gathering pace. Meeting in Davos in January, the World Economic Forum called the worsening wealth gap the biggest risk facing the world in 2014.

In the past, concern about inequality has been driven by the issue of social injustice. The world’s 85 richest people have as much wealth as the poorest half — 3.5 billion people. In the United States, living standards for the bulk of the population have been little better than static over the last three decades, while the share of the nation’s economy taken by the top one percent has returned to levels last seen in the 1920s.

But the evidence is also mounting that excessive inequality is bad news for the economy. Such a view used to be confined to a handful of fringe economists. However, the effect of the crisis has pushed the question firmly into the mainstream economic debate. Converts that now accept the economic risks associated with extreme concentrations of wealth include the International Labour Organization (ILO), the International Monetary Fund (IMF), and a growing number of business leaders.

Of particular concern is the impact of inequality on economic imbalances. Rising inequality has been driven by a sustained shift in the way the economic cake has been divided in the United States, the United Kingdom, and across much of the rich world. According to the Organisation for Economic Co-operation and Development (OECD), the share of national income devoted to wages across the world’s 34 richest nations fell by almost 5 percentage points between 1990 and 2009.

Pro-market theorists have long argued that such a boost to profits would deliver healthier economies and faster growth. Yet the rise in profitability since 1980 has been associated with weaker growth, falling productivity rates, and greater turbulence. Instead of the promised economic renaissance, falling wage shares have created a number of highly damaging distortions, fracturing demand, promoting debt-fueled consumption, and raising economic risk.

There is now a growing — if far from complete — consensus that an excessive imbalance between wages and profits breeds fragility and weakens growth. According to the ILO, nearly all large economies — including those of the United States and the United Kingdom — are “wage-led” not “profit-led.” That is, they experience slower growth when an excessive share of output is colonized by profits.

While living standards have been falling across rich nations, corporate profitability has reached new heights. American corporations are sitting on cash reserves of $1.45 trillion, the equivalent of over a tenth of the American economy, and up a remarkable 50 percent since 2010. Five companies — Apple, Microsoft, Google, Pfizer, and Cisco — hold $347 billion in cash balances. Apple alone has nearly $140 billion in cash. In the United Kingdom, corporate cash piles have also climbed to record levels and now stand at £165 billion. We can add to this the trillions in private accounts owned by the world’s billionaire class.

The world is now awash with spare capital — a mix of corporate surpluses and privately owned liquid wealth. This is money that could have launched a sustained investment and job-creating boom since 2008 In the United States and the United Kingdom, even a portion of it could solve the problem of wage stagnation without threatening competitiveness. Instead, most of it is lying idle — “dead money” according to Mark Carney, the Bank of England governor.

In his previous job as head of the Canadian Central Bank, Carney urged corporate Canada to “put the dead money to work.” He was shown the door. UK companies have turned their backs on similar pleas by cabinet ministers to use their hoarded money to finance desperately needed investment.

What the ILO has called the “dangerous gap between profits and people” is a key explanation for the depth and prolonged nature of the post-2008 slump. The view that a sustainable economy requires a much better balance between wages and profits is widely shared. Christine Lagarde, head of the IMF, has lamented today’s supercharged inequality gap. President Obama has made speech after speech calling for a more measured capitalism and a higher wage share. Yet none of these lofty pleas have been turned into practical action.

Across the globe, the income gap has widened through the crisis. In the United States, 90 percent of the gains from growth since 2009 have been colonized by the top one percent. In the United Kingdom, rewards to executives and financiers have continued to soar while living standards for most have shrunk. The OECD has shown that inequality across wealthy nations was higher in 2011 than in 2007. Little, it seems, has changed.

The risk, even at this early stage of recovery, is that this growing people/profits imbalance will steer the global economy over the cliff again. Consumer credit levels in the United Kingdom are rising at the fastest rate since 2008. In China, low wages are a serious drag on growth.

Meanwhile, global corporate cash surpluses are likely to feed another round of high-risk financial activity aimed at corporate self-enrichment. Investment banks are already promoting a new version of the lucrative collateralized debt obligation (CDO), the financial product that wreaked so much havoc in the buildup to 2008. In the United Kingdom, private equity groups now hold more cash than at the height of the leveraged buyout boom before 2007. The Carlyle Group and Blackstone have $50 billion and $40 billion each of “dry powder” and are waiting to pounce. Far from strengthening the productive economy, such activity risks triggering an artificial boom in share prices while adding millions to the bank accounts of a few hundred executives paid for by another round of staff layoffs.

Recovery across the world is being engineered not by a sustained increase in demand coming from rising real wages and corporate investment, but from artificial stimuli, ones that are boosting asset values, ranging from company valuations to property portfolios. Larry Summers, the former White House advisor, has argued that the Anglo-Saxon economic model seems only able to achieve decent growth by creating asset bubbles.

The solution to this problem is staring us in the face — in short, a rebalancing of the wage-profit ratio in favor of wages. The world desperately needs a pay raise. In the United Kingdom, more than three out of every five jobs created during the crisis years have been in low-paid sectors, from restaurants and hotels to social care and contract cleaning. In both the United States and the United Kingdom — the two countries that top the global low-pay league table — the spread of low pay has had profound social, political, and economic effects. It has boosted in-work poverty, driven up the cost of benefits, and weakened the incentive to work. Even a modest shift from profits to pay would, by boosting demand, encourage private investment, while taking the heat out of developing asset bubbles. If Chinese workers could save less of their meager incomes (which are needed to pay for ill health, unemployment, and old age) and earn more through higher wages, they could buy the goods they produce, boosting domestic demand, and enabling the economy to grow more quickly.

There is mounting public pressure to raise the wage floor. At $7.25, the US federal minimum wage has not been raised since 2007. Last year saw waves of coordinated industrial walkouts by staff from fast food chains to retail outlets. Their call for a significant rise in the minimum wage has been backed by Obama but ignored to date by Congress. In the United Kingdom, all the main political parties favor a modest hike in the national minimum wage — a decision that lies in the hands of the independent Low Pay Commission.

Even a modest rise in the minimum would be good news for those working in the lowest paid jobs. However, it would do little to crack the problem of imbalance. For that to happen would require a much more fundamental shift, one that raised pay for those higher up the wage chain as well. An across-the-board pay rise, of course, is far from easily achieved and would have to be introduced over time. Nevertheless, not only can countries like the United States and the United Kingdom afford a collective pay rise, it is an economic imperative.

The lessons of 2008 have yet to be fully learned. Economies built around poverty wages and huge corporate and private surpluses are unsustainable. Fine speeches against inequality are not enough. Until measures are put in place that lead to a more equal distribution of the cake and break up the great concentrations of income, today’s artificially created recovery will prove very short-lived.


Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality (Gibson Square, 2011).

LARB Contributor

Stewart Lansley is a visiting fellow at Bristol University in the UK and the author of The Cost of Inequality: Why Economic Equality is Essential for Recovery (Gibson Square, 2012). 


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