Tax for Equity (T4E) - Getting Wages back on Track

Frank Hoffer[1]

During the last few decades productivity gains have not been shared fairly in most societies. The resulting growth in inequality has been one of the root causes of the crisis. Austerity and further aggressive wage cuts are currently aggravating the problem. As wage developments are continuously trailing long-term productivity growth, governments need to act in leading economies back to a more balanced growth path. Profits generated by monopolising productivity gains and depriving workers of wage rises in line with productivity should become subject to special taxation. Such a Tax for Equity (T4E) would ensure fair competition and close the opportunity for profit maximisation through wage repression.

Sharing productivity growth
To ensure inclusive and sustainable growth, productivity gains have to be shared between capital and labour. For this to happen, real wage growth needs at least to match the long term productivity growth in a society. As central banks aim at a certain level of inflation, nominal wage growth needs therefore to equal national productivity growth plus the targeted inflation rate of the central bank. Following such a balanced wage norm the increased productive capacity will be absorbed by the higher aggregate demand resulting from the simultaneous increase of wages and profits. Wage growth below productivity leads to either deflation as witnessed in Japan or aggressive export surplus strategies as in Germany; or - if prices are sticky - a decline in real wages, aggregate demand, production and employment. As markets have failed to deliver such balanced wage developments there is a need for policy intervention to stop the macro-economically undesirable wage repression. Wage restraint was achieved in many countries through a weakening of the collective bargaining system, an unprecedented rise in precarious employment and the creation of large unprotected low pay sectors.

Wages for Equitable Growth

Patrick Belser

Average wages around the world
The global financial crisis had significant negative repercussions for labour markets in many parts of the world. The most significant impact has been on employment figures. But the ILO Global Wage Report 2012/13, entitled “Wages and Equitable Growth”, shows that the weakening of the global recovery in the two years after 2010 was also reflected in average wages. Among the group of developed economies, real average wages (i.e. wages adjusted for inflation) fell by -0.5% in 2011, after having fallen a first time in 2008. Preliminary estimates based on quarterly data for 30 countries indicate that average wage growth in that group of countries was around zero in 2012. 

This contrasts with emerging and developing regions, where the growth of both GDP and real wages generally remained positive. Looking at the world as a whole the report found that real average wages grew by 2.1% in 2010 and slowed to 1.2% in 2011. But remove China from the equation and things look only half as impressive, even in the developing world. Note also that it is too early for even preliminary global estimates for 2012 as only few developing and emerging economies produce quarterly wage data, and as annual wage data is often published more than 6 months after the end of the year. 

Source: ILO Global Wage Report 2012/13

Global Wage Trends: The great Convergence?

Patrick Belser

Average wages

The financial and economic crisis has cut global wage growth by roughly half in 2008 and 2009. Based on a sample that covers a large chunk of the world’s 1.4 billion wage-earners, the Global Wage Report 2010/11(i) finds that the global growth in real monthly wages slowed from 2.7 and 2.8 per cent in the two years before the crisis (2006 and 2007) to 1.5 and 1.6 per cent in 2008 and 2009.If China – where data coverage is limited to fast growing “urban units” – is excluded from the sample, the average wage growth drops from 2.1 and 2.2 per cent before the crisis to 0.8 and 0.7 per cent in 2008 and 2009. In 2010, preliminary results suggest that wages have started to recover, but not as fast as profits and not yet to pre-crisis levels. Generally, wages have taken a bigger hit in developed than in developing countries.

Change or lose Europe

Frank Hoffer

Friederike Spiecker

When asked what he thought of Western civilisation, Mahatma Gandhi replied: “I think it would be a good idea.”

After an agonising depression and another devastating war, Europe finally followed Gandhi’s advice and moved from centuries of antagonism, war and “beggar thy neighbour” policies to a world of cooperation and integration. Reintegrating post-nazi Germany, bringing the former Portuguese, Spanish and Greek dictatorships into a democratic Europe and opening up to Eastern Europe are milestones in this complex integration process based on political will, cooperation and regulated markets. But it was only after the ideological shift in the 1980s and 90s that mainstream thinking changed and concluded that the best form of cooperation was fierce competition and radical market liberalisation. However, deregulation, the common market and single currency did not create the promised land of prosperity, but resulted in declining wage shares and greater inequality.

European Economic Governance: The next big Hold Up on Wages

Ronald Janssen

One of the main purposes of the current drive for European economic governance is to transform wages into the main or even single instrument of adjustment under monetary union. Strangely, this idea appears to enjoy a high degree of consensus among both conservative and progressive economists. For the former, extreme wage flexibility including wage cuts and sub-regional deflation is necessary if the rest of the Euro area is to catch up rapidly in competitiveness with Germany. For the latter, the rebalancing of competitive positions is to proceed by setting up some kind of ‘wage planification’ process at the European level in which German wages are to go up while wages outside Germany are going down and stay down for many years to come.