The economics of low wages
When what comes down doesn't go up
Salaries in rich countries are stagnating even as growth returns, and politicians are paying heed. They may struggle to improve thingsand could make them worse
ACCORDING to the rich world's politicians, economics has a new villain. The modish scoundrel of the past seven yearsthe immoral banker outwitting inept regulatorshas been edged out by a returning blackguard: the tight-fisted boss crushing the hopes of honest workers with miserly pay. In America workers have been demonstrating for higher pay and stronger union rights in the profitable but poorly paying food industry. Hillary Clinton has blasted CEOs who earn 300 times what the average worker does, pledging that her run for the presidency will champion the "everyday Americans" who have the "deck stacked" against them. In Britain Ed Miliband, leader of the opposition Labour Party, has told the electorate that he plans to punish "predatory" capitalists that exploit the low-paid; his electoral rival David Cameron retorts that his Conservatives are the "party of working people". In Japan Shinzo Abe has sworn to lift salaries, and cajoles and threatens Japanese bosses to deliver on his promise.
The facts give such rhetoric resonance. In most places the recession that followed the financial crisis had dire effects on wages. Despite five years of growth American real wages are still 1.2% below what they were at the beginning of 2009. In Britain, real wages fell every year between 2009 and 2014, the longest decline since the mid-1800s. In 2014 median pay was 10% below its 2008 high.
While it makes sense for an individual boss to hold down pay, low pay across the economy as a whole threatens to put a lid on the growth that one would otherwise expect after a recession. If it does not there's a chance it will be because households are again borrowing to spend in an unsustainable way.
...Scholars seeking to explain this decline in the labour share reckon a number of big forces are at work. One is that the income from capitalespecially from housinghas been increasing more than the income from labour. Another is that, in many industries, capital goods have become a lot cheaper and/or better. Bosses can choose whether to spend money on machinery or people, and declines in the price of the kit required for a given amount of outputwhich can come about either because existing machines get cheaper or because new ones can do morereduce demand for labour.
Globalisation can reduce the demand for rich-country labour, too. Michael Elsby of the University of Edinburgh and Bart Hobijn and Aysegul Sahin of the Federal Reserve have shown that in industries where imports became a more important part of the supply chain between 1993 and 2010 the labour share fell the most.
The new part of the puzzlethe bit that makes the lack of wage growth after the recession perplexingconcerns the other factor that, in the past, economists have seen as crucial in the setting of wages: unemployment. The usual assumption is that once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up. As firms outbid each other for talent, new workers get better starter salaries and valued staff secure juicy raises. Estimating the unemployment rate at which wage-driven inflation kicks in the NAIRU (non-accelerating inflation rate of unemployment)is part of the core business of central banks.
Matching quandaries
Following a major recession, the NAIRU often goes up. Periods of unemployment have lingering effects on workers, from a loss of vim to clinical depression. Time out of work can mean skills dwindle or become mismatched to the needs of the market; the skills needed by industries that flourish in the recovery may differ from those central to the industries which laid people off in the slump. All this means some unemployed workers will find it harder to get back into the workforceindeed, some may stay unemployed until they reach pensionable ageand their presence on the unemployment rolls thus does little to hold down wages. So after a big crisis the NAIRU rises; inflation should kick in sooner rather than later.
In the wake of the current recession, though, this rule of thumb has been broken in a number of countries (see chart 2). In 2013 the OECD, a rich-country think-tank, thought wage-driven inflation would kick in in Britain if unemployment got back below 6.9%. But joblessness was well below that throughout 2014 and average real wages still declined by 0.6%. In a 2013 paper Federal Reserve economists estimated a stable unemployment-wage rule for America: every percentage-point reduction in unemployment should lift inflation by 0.3% over the next year. But despite the fact that joblessness has fallen by more than two percentage points since then, median hourly wages were the same in the first quarter of 2015 as a year earlier. In Japan, unemployment averaged 3.6% in 2014, well below its pre-crisis average, but real pay fell by 2.5%.
...Work must be a route out of poverty, not a way to stay stuck in it. To that extent new political interest in stagnant and falling pay is welcome if it really boosts what poorly paid workers take home while not deterring job creation. But although the new world of ultra-flexible labour markets has its flaws, those on the left looking for a restored rigidity are playing a dangerous game: the unemployment that could result would help neither those rendered jobless nor those scraping by.
Much more:
http://www.economist.com/news/brief...ven-growth-returns-and-politicians-are-paying
