MYTH ABOUT WAGE GROWTH

We could all agree that in most developed countries the modern era with its scientific discoveries, technological progress and productivity growth has provided significant growth in living standards and real wages of the broad population. Unfortunately, statistics prove stagnation in the United States.

The average salary of CEO of the 350 largest corporations in the US amounts to USD 16.3 million in 2014 (included are also options to purchase shares on the stock exchange). From 1978 to 2014 earnings of CEO has increased by 997%, and for the typical worker has increased only 10.9%. For every dollar of typical workers, general managers receive 303 dollars in 2014 (303 times more) (click here).

Productivity is the total quantity of the product (or income) generated during the average working hour. This category is extremely important because productivity growth has a direct impact on the possibility of real wage growth. If, for example, in a car factory  you want to determine productivity, you can divide the total number of produced cars with a number of workers and determine how much  an average worker produces cars for a period of, let’s say, one year. Productivity growth would indicate that an average worker can, thanks to a new technology, produce more cars in one year than in any previous period. This would therefore mean that there is potential for growth in real wages of that average worker.

However, statistics show that in the United States starting from 1973 there is no direct link between productivity growth and rising real wages of workers in the private sector in direct production. In the chart below, the vertical axis is the cumulative percentage growth starting from 1948, while the horizontal axis represents years. In the period from 1948 to 1973 productivity growth was 96.7%, and real compensation growth was 91.3% , while in the period from 1973 g. to 2014 productivity growth was 72.2% and real compensation growth was only 9.2%. Which means that in the period from 1973 to 2014 productivity grew steadily, while real compensation stagnated. Term compensation means real wages increased for all the benefits that employer provides to employees such as health and pension insurance.

Produktivnost gap USA

If the benefit of a significant productivity growth was not received by workers, it is clear that it was appropriated by the managers and owners of capital, which shows the chart below. If  5% of the richest in the US we divide to 4% of the rich and 1%  of super-rich , then for 4% of rich productivity growth is accompanied by an increase in real wages, however for 1% of the super-rich there is significantly faster growth of their incomes than the growth in productivity.

wp figure 2

 

Profit pre oporez USA

This FRED chart shows that since the seventies of the last century, profits of corporations are rapidly growing, which is in line with the previous charts.

The following chart of the US Federal Reserve (central bank) shows that the share of compensations of employees in GDP has been declining for decades. Which tells us that from the growth of productivity and GDP growth, have benefited mostly owners of capital.

Wage as procent GDP USA

Formula for share of wages in GDP is as follows:

% of wages = (W / P) / (GDP / L)

where W is the nominal wage, P is price, L number of workers and GDP stands for the physical volume of the gross domestic proizvoda.W / P is the real wage measured in amount of product that can be purchased for a nominal wage and GDP / L is actually a productivity- the quantity of product produced by the average worker. Which means that the % of wages in GDP is a ratio of an amount of products that the average worker can buy to the total quantity produced by an average worker. To simplify the case if we have a worker that can produce 10 cars for a year , and is able to purchase 1 car for his nominal wage, than percentage of wages in GDP is 1/10 or 10%, and if in next year he produces 15 cars (GDP growth of 50%), and real wage remains the same, then the % of wages in GDP is 1/15 or 6.7%. If we assume that the profit per unit (per car) remained the same, then the owner of the capital, thanks to productivity growth, increased his profits by 50%, while the real wages of workers remained the same, and as a consequence the share of real wage in GDP has declined.

So, the statistics in the United States show that there is a room and possibility for growth in real wages, improvement of working conditions and increases in benefits for workers.

The Economic Policy Institute has launched an initiative to raise wages in America (click here).

Their proposal includes the following measures:

1.Raise the minimum wage;
2.Update overtime rules;
3.Strengthen collective bargaining rights;
4.Regularize undocumented workers;
5.Provide earned sick leave and paid family leave;
6.End discriminatory practices that contribute to race and gender inequalities;
7.Support strong enforcement of labor standards;
8.Prioritize very low rates of unemployment when making monetary policy;
9.Enact targeted employment programs and undertake public investments in infrastructure to create jobs;
10.Reduce our trade deficit by stopping destructive currency manipulation;
11.Use the tax code to restrain top 1 percent incomes.

Item 3 could be interpreted as a need to undo anti-union legislation that was in the spirit of neoliberal dogma, which lasts even today. Item 10 can also be extended to other economic measures leading to a reduction of the trade deficit, which affects the level of employment in a country, however, this requires careful consideration, because the workers are at the same time consumers, and consumers have benefited from low-cost imported products. Also, the economic structure in these developed countries showed flexibility and ability to transform from manufacturing economy to service economy and thereby preserve employment, and that happened under the pressure of globalization or free trade.

What would be my criticism of the said proposal is the lack of the following measures:

1.Participation and the way of participation of workers in the profit sharing should be mandatory by law (this would harmonize productivity growth and compensation growth);
2.Effective tax rates on corporate income should be raised while unburdening middle class (click here);
3.Reduction of regular working hours to a six-hour working day and 30 hours for a work week. Workers would get more time for personal happiness and development, and this  would also have a long-term effect on reducing unemployment.

The obstacle for realization above mentioned measures is a strong political influence of super-rich class and globalization, tailored to fit multinational corporations, which enabled them to have great blackmailing capacity, sufficient enough to discourage even governments with good intentions. The fear of capital flight is also a strong argument  for the trade unions.

Potential causes of the economic crisis, are created in a conflictual situation, when the state, on the one hand, is trying to maintain the standard of living for broad population, and therefore social, political and economic stability, and on the other hand, is trying to create a social environment that favors corporations in fear of capital flight.The price for this paradise garden for multinational corporations is budget deficits, over-indebtedness, inadequate monetary and fiscal policies, unemployment and declining living standards. The attempt of the benevolent government to bring the situation to a state of normality runs the processes that are confronted with the logic of globalization, tailored to fit multinational capital, causing earthquakes and fractures. This can be resolved by harmonizing the legislation, primarily the tax legislation at the global level. Why would it be legitimate to talk only about political democracy and political human rights, and not about the social rights, democracy in the workplace, exploitation, labor rights, consumer rights and tax havens. Capital will always find havens, free of taxes and workers rights and thereby fuel the competition between countries that are in the race to the bottom exposed to self-destruction. Harmonization of legislation at a global level would also prevent the emergence of a phenomenon, in individual countries, that these issues are the subject of trade between the political parties and the super-rich elite, as well as the subject of election campaigns.

Generally speaking, all the economic and social decisions of the country must have prudently balanced solutions that take into account the interests of workers, consumers and the owners of capital. Statistical data show that in the United States since the seventies of the last century to the present, this balance of interests is undermined and that neoliberal solutions are overwhelmingly favoring the interests of capital owners.It has an extremely negative macroeconomic effects, since only the growth of real wages based on productivity growth (GDP per worker), can provide the healthy growth of the purchasing power of workers i.e. healthy growth of aggregate demand, which stimulates production growth (GDP growth) and therefore leads to the continuous growth of the living standards of the population. For too long consumption grew on consumer credit borrowing, from what, of course, benefited only the banks and corporations that put a share of their profits into banks, however, that kind consumption growth, has its limits and is not a solid ground for the growth of GDP.

Citizens spend more than they earn, instead of real wage growth credits are growing, the governments due to inadequate tax policy, are spending more than they receive revenue, and corporations hide excess cash in tax havens, because they have a fear of investing due to weak aggregate demand.

It’s time for progressive political forces in the world to stop this vicious circle of evil and ensure sustainable and stable prosperity in the world.

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