House of Paine

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Who Gets the Cookies?
The Economist asks how workers can maintain or increase their share of income when the forces of globalization are working against them: 

Decoupled, by Ronald Gant, The Economist: "Nothing contributes so much to the prosperity and happiness of a country as high profits,” said David Ricardo, a British economist, in the early 19th century. Today, however, corporate profits are booming in economies, such as Germany's, which have been stagnating. And virtually everywhere, even as profits surge, workers' real incomes have been flat or even falling. In other words, the old relationship between corporate and national prosperity has broken down. 

This observation has two sides to it. First, ... companies are no longer tied to the economic conditions and policies of the countries in which they are listed. Firms in Europe are delivering handsome profits that are more in line with the performance of the robust global economy than with that of their sclerotic homelands. ... Europe's and Japan's stockmarkets have outpaced those in America, despite the latter's faster GDP growth. 

Second and more worrying, the success of companies no longer guarantees the prosperity of domestic economies or, more particularly, of domestic workers. Fatter profits are supposed to encourage firms to invest more, to offer higher wages and to hire more workers. Yet even though profits' share of national income in the G7 economies is close to an all-time high, corporate investment has been unusually weak in recent years. Companies have been reluctant to increase hiring or wages by as much as in previous recoveries. In America, a bigger slice of the increase in national income has gone to profits than in any recovery since 1945. 

The main reason why the health of companies and economies have become detached is that big firms have become more international. ... With the profits of these firms so dependent on their global operations, it is not surprising that corporate prosperity has failed to spur “home” economies. ... If a large part of the spurt in profits comes from foreign operations, it is less likely to be used to finance investment or extra job creation at home. ...

Globalisation has also shifted the balance of power in the labour market in favour of companies. It gives firms access to cheap labour abroad; and the threat that they will shift more production offshore also helps to keep a lid on wages at home. This is one reason why, despite record profits, real wages in Germany have fallen over the past two years. ...

Workers can still gain from rising profits if they own shares, either directly or through pension funds. ... In America, capital gains on shares have played a big role in supporting household spending over the past decade. But ... workers in continental Europe are losing out... This is partly because of the smaller role played by institutional investors, such as pension funds, in Europe compared with, say, America. 

If profits (and hence executive pay) continue on their merry way, while ordinary employees' real wages stand still and their health benefits and pensions are eroded, workers might well expect their governments to do something to close the gap. ... higher taxes on profits, restrictions on overseas investment, import barriers, or making it harder to lay off workers. The trouble is, in a globalised economy ... Firms would simply move operations' head offices to friendlier countries. 

A more promising way of allowing workers to share in companies' prosperity is to encourage firms to introduce profit-sharing schemes for employees. But perhaps the most useful thing that governments can do is to ensure that consumers ... benefit from lower prices as a result of the shifting of production to low-cost countries. The prices of consumer goods have fallen by much more in America in recent years than in the euro area, where retailers are shielded from competition... Greater competition in Europe would allow workers to share in the gains of globalisation through lower prices. ...

The main reason given for stagnating wages is that earnings have higher expected returns when invested in foreign rather than domestic markets or when used to increase domestic wages, and a secondary reason is a shift in market power in labor markets toward firms. If so, firms won't voluntarily increase the share of profits going to domestic workers at the expense of more profitable opportunities elsewhere. Are tax breaks or some other form of government intervention needed to "encourage firms to introduce profit-sharing schemes for employees" or to encourage firms to put other policies in place to increase, or at least maintain, labor's share of income? I'm not there yet, but if politicians insist on implementing tax breaks, why not think along these lines?

Posted by Mark Thoma on February 25, 2006 at 01:47 AM in Economics, Income Distribution, Policy, Unemployment | Permalink 

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Comments
Tax breaks? How about increasing the minimum wage?

You can't outsource everything. Most jobs that earn minimum wage or anything near it are service jobs. Some kid in Bangladore can't super-size your combo meal or wipe down your car at the car wash. Raising the minimum wage has ripple effects up through the economy as everyone has to pay a little more for their employees.

The notion that raising the minimum wage displaces jobs has a lot of the empiric backing that lowering taxes increases both the job base and overall revenues. Sure I can draw a curve on a napkin, but where's the beef, i.e. show me the numbers.

Posted by: Bruce Webb | Feb 25, 2006 7:00:09 AM

> The notion that raising the minimum wage displaces jobs has a lot of the empiric backing that lowering taxes increases both the job base and overall revenues.

The proposition that increasing the price of something decreases market interest has quite a few data points behind it. Jobs might be an exception to this, though it is hard to see why, and of course there is the example of Europe to attest that jobs are not at any rate an exception in all cases.

On a related note, I just spent a couple of days with a nice Dutch journalist who was decidedly of the opinion that the greater success of the United States at integrating Muslims compared to Europe was attributable to all our cheap jobs. 

Posted by: Fred Hapgood | Feb 25, 2006 7:44:34 AM

I've always thought if you want to maintain good jobs here then you need to have tax laws that favor placing capital here... good jobs seem to always follow capital.

That and remove economic hurdles to hiring... things like benefits & payroll taxes that follow wages... fund them some other way.

In the current political climate I'm not optimistic either change can or should be attempted. While I'd love to see the safety net including SS & Medicare benefits funded out of a consumption-like tax ... I don't trust the Bush administration to do it in a fair & sustainable way. I share Bruce Webbs concerns that any opening of the topic will lead to its destruction.

But if health insurance, SS & other benefit funding could be lifted off payrolls then there wouldn't be as big a pressure to keep payrolls low. Especially in high skill low labor intensity high capital intensity jobs.

Then allow for rapid depreciation of all that expensive capital placed here in country & you have a very different job climate... one where wages would probably be bid up as opposed to now where they are weighted down.

But then maybe I'm wrong.

Posted by: dryfly | Feb 25, 2006 8:28:25 AM

I had a wholly different insight about what unites some of the trends referenced above, and it relates to the rate of technical change and of productivity increases. 

Increases in total factor productivity, spurred by technical change and, particularly by the computer/communications revolution, have implications, which are not addressed, when we focus on the relative market power of labor and capital in determining wages.

Increasing total factor productivity makes "everything" cheaper, but, paradoxically, it also makes "everything" more expensive. That is, the prices of final goods and services (adjusted for inflation) fall, but the cost of the factors of production rise. The value of previously invested capital can fall dramatically, and be replaced by smaller amounts of capital. Whole industries can be wiped out, as their long-continuing rents, disappear. For large business corporations, if these changes occur at the right rate, the replacement of a historically high-cost capital base with a currently lower-cost capital base can result in high cash flows and profits. Nominal productivity is rising, but, paradoxically, the "real" invested capital per worker may be falling rather dramatically, and the currency value of output per worker, at current, falling prices, is also declining, (even though, in a sense, the output has increased by a multiple).

Think about the phone company (any phone company) for a moment. Phone companies were once the bluest of blue chip companies, and their highly unionized workforces very well-compensated. Cell phone systems and the internet are rapidly displacing the switched circuit mountain of copper wire; phone companies ten years (or maybe only five years) from now will be DSL companies or they will be nothing. Switched long-distance and faxes -- long the backbones of their businesses -- will go the way of the telegram within a decade! The actual invested capital required for the internet (the packet-switching network, much of it fiber optic, which is replacing the Bell System mountain of copper) and cell-phone grids is orders of magnitude less. Orders of magnitude less! (That's why primitive third-world countries, which never had a functioning landline phone system have first-class cellphone systems -- cell-phone systems, for all their high-tech accourtrements, do not require any thing like the sophisticated capital accumulation, which lay behind a functioning a phone system, circa 1965.)

What I am saying is, maybe it is not globalization, per se, but the rapid obsolescence of previously accumulated capital, driven by accelerating rates of technological change. The revolution in computing/communications technological has been accelerating (that's a key word), and the pervasive result is to make control of production processes cheaper and vastly more effective, increasing total factor productivity, potentially, across almost all industries. In the simplest, most abstract terms, improved control of production processes reduces error, which enhances total factor productivity.

Tangible accumulated capital is being made obsolescent and is being replaced by much smaller amounts of capital. Declining invested capital per worker is undermining the usual effect on wages of increasing productivity, and the high profitability of large corporations (with large historical invested capital) is, in a sense, partly illusory.

One logical recommendation, for macroeconomics, which everyone would hate, is that we need to push up the rate of monetary inflation to better match the nominal rate of productivity growth. If productivity is now growing at 3.5% per annum, then inflation ought to match that.

Posted by: Bruce Wilder | Feb 25, 2006 9:17:22 AM

Here is a question from a non-economist. 

I have read Ricardo's theory of 'comparative advantage' with its explanation of the benefits of free trade between nations. 

How does that theory apply to a world in which the major unit of economic activity, the corporation, is international, but workers and govts continue to be defined by and contained by the nation? 

I am not asking for speculation on how workers and govts will somehow become more international, like the corporation.

I am curious about how the theory of comparative advantage is understood to apply to a world where the very meaning of 'trade between nations' seems to have undergone a profound shift. 

For example, when production and engineering jobs are sent offshore, and what remains in the USA are jobs that require face to face interaction, does that mean that face to face interaction is the American 'comparative advantage'? How does that constitute an advantage for us, in terms of trade? What is being 'produced' (face to face interaction) is precisely that which cannot be traded. 

Before international corporations (back in the time of Ricardo) it seems that businesses would have to concentrate on what they could *produce* for trade, in order to have a business. But when the businesses set up shop in both trading partners, they don't need to produce anything at all for trade (export) in some locations (the high wage locations, such any already developed country). It seems to be this condition, which is our current condition, invalidates some of the theory's underlying assumptions. I would like to understand more, thanks very much. 

Posted by: camille roy | Feb 25, 2006 9:55:02 AM

Bruce:

I think what you are talking about would be accomplished by a devaluation of the dollar. Once we tip into a mild recession, the Fed will have to lower the Fed Funds rate, then the dollar will start sliding again. 

This is the adjustment which needs to happen, but has been suspended up by a combination of Asian CB dollar reserves, yen-dollar carry and petro-dollar accumulation. 

I don't see any realistic scenario where this happens really abruptly -- the upward pressures on the dollar are "diversified" if you will, so unlikely to all simultaneously disappear. But lower interest rates here in the US might serve to reverse the trend in dollar fx rates.

Posted by: STS | Feb 25, 2006 10:16:20 AM

"> The notion that raising the minimum wage displaces jobs has a lot of the empiric backing that lowering taxes increases both the job base and overall revenues.

The proposition that increasing the price of something decreases market interest has quite a few data points behind it. Jobs might be an exception to this, though it is hard to see why, "

Hmm because setting a minimum and enforcing it means that whatever employees you hire get paid more? If you want to sell car washes or hamburgers you need to have employees. Now employers can always choose to find ways to become more efficient leading to needing to hire fewer workers but there is a limit to doing this in service industries. Motel chambermaids and nursing home night nurses are not going to be replaced by Japanese robots anytime soon.

The argument that increasing the minimum wage eliminates some jobs leads a rational observer to say "so what?". Unless it is a large percentage of the workforce the net loss of jobs is more than made up by the increased share of national income by those who keep their jobs. The net is the proper measure. And when those deplaced because of the increase in minimum wage get new jobs they will be getting paid at the higher rate.

Somehow opponents of raising the minimum wage count on workers disregarding their own economic interest in favor a some small fraction of fellow workers. Why? Those shareholders who cheer when companies lay off thousands privilege their economic interests to those of the workers concerned. Why should workers as a whole be any different?

Unless right economists can show that the overall share of national income flowing to workers shrinks when the minimum wage increases I am not going to pay them any attention. The notion that everyone in the firm should turn down a raise because otherwise Fred in the mailroom will lose his job runs afoul of the central principle of market entrepreneurs, i.e. "what is in it for me?" Good for the goose, good for the gander.

Posted by: Bruce Webb | Feb 25, 2006 12:11:56 PM

Right-wing arguments against raising the minimum wage would begin to make some sense, only if the minimum wage was about 3 times what it, in fact, is.

In a period of accelerating technical change, and rapid loss of accumulated capital, it would make sense to raise the minimum wage substantially, perhaps doubling it as a starter. The minimum wage becomes a floor under labor productivity, and would help us to spot problems. If, in fact, there are people, who are genuinely unemployable at $10+/hour, then we need the market to identify those people, so proper interventions can be made, to make them employable at a decent wage. Employing them in low productivity occupations, so they can suffer in poverty makes no sense, whatsoever.

Posted by: Bruce Wilder | Feb 25, 2006 12:25:16 PM

Not to mention that studies that show that increasing minimum wage in one state affect hiring in adjoining states are kind of thin on the ground. People are not going to drive even ten miles over the state border to save a quarter on a pizza. And even these effects are eliminated by raising the national minimum wage.

Posted by: Bruce Webb | Feb 25, 2006 12:27:09 PM

my my is this a sizzlin topic

some one brings up ricardo 
wage share 
and suddenly we izzzzz off to the races 

brilliant lights go on up and down
the comment scroll

my quick and prolly reckless take:

webb as usual holds tight to the basic reality

max the wage rate min
on nontradeable jobs 
and i'll add its complementary reg
min the daily hour max 

but add a true full employment macro policy to this or it will give you....
france 

quick answer to comp advantage

this real world doesn't give 
the ricardian comp advantagemechanism
a chance to work fast enough 
if at all

just add credit to your system
and the barter esquue automatic adjustments
crucial to ricardo's model
and the national( let alone class)
welfare results go poop 

ie
credit lines lenthening and 
suddenly getting cut
effectively knock ricardo into a cocked hat 

the wage rate arbitrage trans nat corporations can engage in is just a further elaboration of this problem 

answers???

i'm a bit of a johhny one note on this:

but the export of capital
from north currency countries 
to south currency countries 
is the key here

if you look at the loop 
you see overvalued north capital
buying undervalued south ..labor
and send the products back to the overvalued north markets

a nice Rx for extreme profits 

and one
that will not be effectively halted
until the whole north currency system
is leveled with the south currency system 

ie hiking up china alone won't get it stopped 


for sure despite the good intentions here
i'd not try bribing trans nats with tax brakes
to hire more northees 

they'll gladly take the brakes
butmy guess
we'd all live to see the effects washed away
as south currencies' forex 
vs north currencies 
fall even further in fact by systemic intrinsics fall till
they've wipe out the tax brake diff entirely....

running faster and getting their later 

Posted by: slink | Feb 25, 2006 1:21:15 PM