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Saturday, February 25, 2006

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 on Saturday, February 25, 2006 at 01:47 AM in Economics, Income Distribution, Policy, Unemployment | Permalink  TrackBack (0)  Comments (34)

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