In the US the jobless rate is falling faster than expected, wrongfooting the assumptions on which the Federal Reserve’s new-fangled forward guidance was based. Officials in Brussels are trumpeting falling unemployment in Ireland and Portugal as proof that austerity works. Some see the recent sharp falls in government borrowing costs in the eurozone periphery as an indication that 2014 will be a breakthrough year for the 17 countries of the monetary union.More
On this story
- Labour eyes policy change on EU workers
- Chris Giles Pros and cons of raising UK minimum wage
- Low inflation dogs the eurozone economy
- Challenging year forces Brazil to rethink
- Businesses expected to ‘expand, invest and hire’
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- Lex Eurozone banks – peripheral vision
- Battle of the Banks Barclays and Deutsche
- Wolfgang Münchau What 2014 holds for euro crisis watchers
In the UK, meanwhile, John Cridland, the head of the CBI employers’ body, caused surprise this week by saying he would like to see wages rise as the economy recovered. Still more surprisingly, George Osborne, the UK chancellor, faces pressure from fellow Tories to deliver a rise in the minimum wage in excess of inflation.
Could this be an early indication that the high tide of extreme inequality is on the turn? And will 2014 be the year in which labour finally regains ground in the perpetual tug of war between labour and capital? All that is clear at this stage is how much ground there is to make up. Profits as a share of gross domestic product have gone from under four per cent in the mid-1980s to a post-war peak of 11 per cent last year, a statistic that would gladden the heart of a 19th century American robber baron.
The share of wages has fallen consistently from the early 1970s as workers lost their ability to translate higher productivity into higher pay. That was partly a story of declining union power, the addition of a large pool of female labour to the workforce, technologies displacing workers and latterly an increased supply of workers from the developing world entering the global labour market.
The employment consequences of the Great Recession that followed the financial crisis would probably have been worse without the central banks’ bond buying programmes. Yet a consequence of quantitative easing has been increased inequality, because the chief impact has been on bonds and shares, which are mainly owned by the rich.
Marc Faber, an influential Asia-based strategist, sees QE as an aberration that funnels money to the “Mayfair economy” of the well-to-do and “boosts the prices of Warhols”. The middle class holds a much greater share of its wealth in housing. So in the US central the QE programme may have mitigated the fall in house prices, but it created no wealth effect to encourage consumer spending.
As for the working class, its savings tend to be in the form of bank deposits, which have yielded negative real returns as central banks have resorted to financial repression, whereby interest rates are kept below the rate of inflation. This is intended to stimulate economic activity by giving consumers an incentive to spend instead of save. But this offers scant consolation to those whose nesteggs are being eroded.
Companies have done pretty well out of ultra-loose monetary policy too. Economists at the McKinsey Global Institute reckon that US companies enjoyed a cumulative interest rate windfall of $310bn since 2007. This increased corporate profits by five per cent and accounted for just over 20 per cent of profits growth over the period. There were similar effects in the UK and continental Europe where annual earnings were estimated to have increased by five per cent and three per cent respectively. Yet this, too, came at the cost of more inequality since large companies derived much of the benefit by issuing low-cost paper in capital markets whereas smaller companies lack access to bond markets and were more reliant on expensive bank finance, if they could borrow at all.
For anyone to become seriously optimistic about labour making a comeback, it would be necessary to see an early depletion of the reserve army of labour in the developing world. China, where industrialisation and urbanisation are already well advanced seems unlikely to exhaust its excess labour supply in this decade. India remains at a much earlier stage of development. The scope for a return to a more unionised workforce in North America and Europe seems limited.
All of this makes it unlikely that the disconnect between growth and wages in the developed world will quickly become a thing of the past. It also suggests that current confidence in Brussels about the eurozone’s employment prospects borders on hubris, especially given persistently dreadful labour market data. If Portugal and Ireland are success stories with unemployment respectively at 15.5 per cent and 12.3 per cent, the official lens is seriously distorted.
And the real disaster lies in youth unemployment. In no-growth Italy, where the jobless rate of 12.7 per cent is at the highest level since the 1970s, youth unemployment is 41.6 per cent. The comparable figures for Spain and Greece are 57.7 per cent and 54.8 per cent. That is an appalling consequence of creditor countries in northern Europe putting all the burden of adjustment on the debtors after the sovereign debt crisis. It remains a big worry that the eurozone recovery looks so fragile.
Could increases in the minimum wage in the US and the UK make for less inequality? Provided the rates are not set too the impact would probably be benign. Yet the real driver of income inequality over the past decade or so has been top pay – more specifically the pay of chief executives and bankers whose bonuses have too often been based on profits that turned out to have been unreal after the crisis erupted.