ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
Rising inequality generating global social unrest
, November 26, 2011
Across the globe, the proportion of national income going to wages has been falling for three decades, made worse by the global financial crisis (GFC) and austerity measures.
It also explains the growing social unrest across Europe and the United States.
Labour’s share of the economic pie varies across the business cycle, but has been consistently falling since the early 1980s.
Growing US income disparities: 1979-2007.
According to Peter Orszag, vice-chairman of the global banking Citigroup Inc., the fall is substantial. Writing in Bloomberg (October 19, 2011), he said that in the US, labour’s share of business income fell from 63 per cent in 1990 to 58 per cent in 2005.
That 5 per cent fall amounts to $US500 billion a year in wages.
“In other words, if labour’s share hadn’t fallen, labour income would be $US500 billion higher this year,” writes Orszag.
He points out that similar decreases have occurred in other countries. Labour’s share of the economic pie dropped 4 per cent in Germany and France and 6 per cent in Australia and Japan between 1995 and today.
According to Francisco Rodriguez and Arjun Jayadev, in a 2010 UN paper, The Declining Labor Share of Income, the labour share across the globe has “been subject to a consistent decline over the last two decades, contrary to the (earlier) received wisdom of a constant labour share across most regions in the world”.
The shift has had two primary drivers, globalisation of the world economy and rapid technological change, according to Florence Jaumotte and Irina Tytell in a 2007 paper for the International Monetary Fund, How Has The Globalization of Labor Affected the Labor Income Share in Advanced Countries?
Both factors have played equal and crucial roles in labour’s shrinking share of the economy.
Globalisation saw a vast expansion of the world’s labour supply, forcing workers in advanced economies into competition with low-wage workers in the emerging markets. Also, automation has reduced the demand for labour.
As higher-paying manufacturing jobs disappear in developed economies, most displaced workers shift into lower-paid jobs in the service industries. This has contributed to a widening disparity of wealth in the US.
The Paris School of Economics’ World Top Incomes Database shows that from 1980 to 2008, the gross income of the richest 1 per cent of American households rose by 172 per cent, while the bottom 90 per cent rose just 2 per cent.
Writing in the New York Times (October 15), Nicholas D. Kristof says that the CIA’s own ranking of countries by income inequality shows that this disparity of income has left the United States a more unequal society than either Tunisia or Egypt.
He says that three factors underscore that inequality:
• The 400 wealthiest Americans have a greater combined net worth than the bottom 150 million Americans.
• The top 1 per cent of Americans possess more wealth than the entire bottom 90 per cent.
• In the George W. Bush expansion from 2002 to 2007, 65 per cent of economic gains went to the richest 1 per cent.
Comments Kristof: “There’s a growing sense that lopsided outcomes are a result of tycoons manipulating the system, lobbying for loopholes and getting away with murder.
“Of the 100 highest-paid chief executives in the United States in 2010, 25 took home more pay than their company paid in federal corporate income taxes, according to the Institute for Policy Studies.”
Inequality matters. Robert H. Frank, of Cornell University, shows in his book The Darwin Economy that among 65 industrial nations, the greater the inequality the slower the rates of economic growth on average.
Conversely, countries grow more rapidly in periods when incomes are more equal.
In the US, between the 1940s and 1970s, when there was greater equality, economic growth was strong. Since then, inequality has surged and growth has slowed.
Inequality leads to higher levels of family breakdown, declining health and a range of other social evils.
We need to be reminded that the economy is not just about figures and charts, but about families and human well-being.
The Western democratic system has established its legitimacy on a broad social contract, an understanding that a rising economic tide would lift all boats, even it some few boats rose more than others.
But for the past 30 years, the benefits of globalisation and automation have accrued to a privileged few and the rising tide has left most well behind.
Now the global financial crisis has hit the bottom 90 per further. Worldwide there are 80 million fewer jobs.
Many political leaders have said that the current crisis will take years, if not decades, to overcome.
Growing global unrest will test the legitimacy of the Western democratic model.
Patrick J. Byrne is vice-president of the National Civic Council.