A telling graph below showing how the wages of different sectors have been affected by GFC. As you would expect the car industry and the manufacturing sector saw a decrease in wages but those in the financial sector have benefited from a rise in their pay.
In early August this year fast-food workers across the US staged a walkout in protest about their levels of pay – they were demanding an increase from $7.25 (Federal Minimum Wage) to $15 an hour. Under the current minimum wage a worker’s income is $15,000 per annum which is below poverty level pay. Although the minimum wage has increased it is still below its peak in 1968 when it was worth approximately $10.70 an hour in today’s dollars. As well as the low pay, workers in the fast food industry get few benefits and also prospects for full-time work are limited. Add to that a weak job market and ultimately bargaining position, the prospects for these workers look bleak. Although this low pay has been prevalent for many years why is it that is has become such a political issue?
Why are older workers in fast-food and retail jobs?
Historically these part-time jobs have been filled by students or parents looking for work to supplement the family income. However with the downturn in the US economy and increasing unemployment, many in the labour force have had no choice but to try and pick-up any available work. This includes major income earners for families and today low-wage workers provide up to 46% of their family’s income. This is in contrast to forty years ago where there was no expectation that fast-food or retail jobs would provide the living wage as they were not the jobs that the main breadwinner in the household was employed in. In the 1980s profitable companies like Ford, General Motors and other manufacturing industries were big employers in the US economy. Workers were well paid and also had the benefit of pension plans and medical cover. However globalisation and the drive for lower costs have seen a number of US firms looking to locate overseas in countries such as Mexico and China.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
I found this graph in New Zealand Association of Economists publication entitled “Asymmetric Information”. It shows the effects of immigration policy and considers the broader effects of immigration – not just the simple fact that immigration increases the size of the labour force and therefore puts downward pressure on wages. It suggests that immigration shifts the aggregate demand curve to the right and this can increase inflationary pressure which ultimately raises wages. There is also the chance that this could lead to an outward migration of domestic workers as their jobs are taken by those coming into the country. Below is an extract from the article:
The model shows the flow of immigrants in the centre of the diagram, and the well-recognised downward impact on domestic wages through increased supply. The extent to which increased supply of immigrants can impact domestic wages depends on the occupational attainment of immigrants, and the extent to which immigrants are substitutes for domestic labour.
The left-hand side of the diagram shows the added effect of immigration, with an upward effect on domestic wages through increased demand for goods and services and new job creation. This effect can explain why wage decreases may not result after an influx of immigrants. In addition, a feedback loop is shown on the right-hand side, which shows that if downward pressure on wages is created, outward migration of immigrant or domestic workforce would have an increasing feedback effect on wages. The out-migration part of the diagram is pertinent to New Zealand due to its geographic and institutional proximity to Australia.
Just covering the labour market with my A2 class and New Zealand at present gives some good examples of labour market imperfections. You would think with the commencement of the major rebuild in Christchurch would have positive effects on the New Zealand labour market. Economists had forecast unemployment to drop below 6% at the end of 2012 however the December quarter had the rate at 6.9%. The Westpac Economic Overview came up with some reasons as to why employers have been reluctant to take on more labour.
1. Employers are increasing the hours that labour is working rather than taking more on. After the GFC a lot of employers kept labour but reduced their working hours so when the economy starts to grow there is a tendency for them to increase the working hours rather than employing new staff.
2. There has a lack of geographical mobility as workers have been reluctant to move away from areas of New Zealand that have weak growth to those that require more labour – eg. Canterbury. Since late 2010 job vacancies in Christchurch have increased dramatically and employers have found it increasingly difficult to find labour = wages have risen faster in Canterbury than most of New Zealand. The RBNZ reported that this two-speed labour market is suffering from the lowest matching efficiency – the speed with which job vacancies and additions to the labour force translate into jobs. This implies higher wages and higher unemployment than normal.
3. The high NZ$ make imported capital cheaper and there has been an increase in a firms’ intentions to invest in plant and equipment (form overseas) but a reluctance to spend money on new buildings or labour.
US workers need to work 5 minutes
Germans – 7 minutes
Czech Republic – 7 minutes
Australia – 12 minutes
UK – 14 minutes
Mexico – 15 minutes
Philippines – 38 minutes
India – 54 minutes
World average – 20 minutes
Growing adult populations and rising living standards mean that beer consumption in emerging markets is booming. Drinkers there drank two-thirds of the world’s beer in 2011. By 2016, it will be 72%.
Former IMF Chief Economist and the person who saw the financial crisis coming, Raghuram Rajan, has argued that inequality caused the crisis and the US government helped in the process. Since the days of the Reagan Administration wages of the working class American have been falling behind. Reagan, as with Thatcher in the UK, introduced pro market reforms in the 1980’s but recent presidents have addressed the problem of stagnant wages by making access to mortgage finance a lot easier.
In 2007 – 23.5% of all American income went to the top 1% of earners – the highest percentage since 1929. Research has shown that the behaviour of the richest 20% has affected the spending of the bottom 80% – the more the rich spend the more the lower incomes want to keep up with them. It is commonly know as ‘trickle-down consumption’.
Less equitable distribution of wealth can boost demand for government borrowing to provide for the lower income. In the last decade this borrowing would have occurred with financial globalisation that allowed many governments to rack up debt cheaply. It seems that the ease of credit drives inequality.
You will have heard to the Big Mac index which was developed by The Economist magazine. It shows the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. Reading the WSJ, Orley C. Ashenfelter of Princeton University has come up with McWages which shows the number of minutes a McDonald’s employee needs to work in each country to buy a Big Mac. Ashenfelter states that McDonald’s workers in most countries perform similar tasks to produce an homogeneous product – the Big Mac. So by calculating the amount of time an employee needs to work to afford a Big Mac you can show how wages differ across countries. Poorer countries tend to have McDonald’s employees working longer than their counterparts in the developed world. In China you would have to work 85 minutes as compared to 27 minutes in the US. Workers in India and China saw improvements between 2000 and 2007. While the real wage — or Big Macs per hour worked — was virtually unchanged in developed countries during the period, China’s and India’s real wages grew 9% and 8% per year, respectively.
Ashenfelter also notes a worrying effect of the financial crisis. Between 2007 and 2011, the growth of real wages slowed in China, while Indian workers actually lost ground — going from 168 minutes in 2007 to about 195 in 2011. The U.S. and Western Europe lost ground during the period as well.
The Week magazine produced a very informative article on the German Labour market which focused on the creation of mini-jobs and their impact on the German economy. The German economy is racing ahead of the pack in the eurozone area and when you look at its fundamentals you wonder if it is going lap its counterparts. With unemployment in the eurozone reaching an all-time high of 10.7% the level in Germany is at its lowest for for 20 years at 6.7%. The German success is due in part to the weakness of the euro which has fallen 15% against the US$ since 2008. The weaker euro makes all European exports cheaper and Germany has been very well placed to take advantage of this. – in 2011 it recorded a trade surplus of €158bn. However Germany wouldn’t be in this position if it hadn’t been for some major reforms in its economy 10 years previous. As the other EU countries relaxed labour laws Germany used the global boom to tighten its regulations.
By early 2000, and 10 years after reunification, Germany was seen as the sick man of Europe. Unemployment had reached 10.5% by 2003 and then Chancellor Gerhard Schroder asked Peter Hartz (Head of HR at Volkswagen) to look at the labour market. He concluded that German work practices were outdated when a single earner could support households with 9 to 5 jobs at the same time there were generous unemployment benefits. In its place he proposed “mini-jobs” and 2007 10 million Germans had a mini-job with 7 million relying on them as their only source of income.
What are the benefits?
The main idea was to create as much flexibility as possible. The main characteristics are as follows:
1. Mini-jobs pay up €400 a month
2. Employers must assist another €100 to the state for social security benefits.
3. As long as the €400 limits not breached, workers pay no tax
4. They can do as many mini-jobs as they like.
5. The jobs are designed to be picked up and dropped at short notice.
This flexibility meant that during the major recession of 2009 Germany did not experience mass lay-offs. In fact the government implemented a programme which allowed employers to cut the hours of employees and the government would subsidise the remainder of the employees pay.
Although a very competitive low-wage economy was built it has widen the divide between the income levels in the labour market. In fact after the US and South Korea, Germany has one of the most unequal labour markets in the developed world. As there is no set minimum wage for “mini-jobs” a person can earn €4 a hour to under €1 per hour. With around 50% of the labour force in “mini-jobs” there is a free market in which wages have been falling. Between 2000-2010 average salaries rose, but low incomes – those below €960 a month – fell by 10%. Almost 1.5 million people with “mini-jobs” now rely on the state for benefits, including 358,000 who work full time but can’t live off their pay. See video clip below from Deutsche Welle.
Just been teaching wages at A2 level which includes the impact of trade unions. This reminded me of a great sketch by the ‘Not the Nine O’Clock News’ team including Rowan Atkinson as the union representative. Although there are only photos in the clip the dialogue is very good.
Here is a great graphic from the Economic Policy Institute in the US. The Occupy Wall Street protesters claims are backed up when you look at the graph below. Data is inflation-adjusted.
Bottom 90% of households saw a 5% increase in income
Top 1% of households saw a 224% increase in income
Top 0.1% of households saw a 390% increse in income
The major increases happened during the Clinton Administration especially with the repeal of the Glass Stegal Act in 1997 – 0.1% and 1% incomes increased dramatically after this period. The drop in the % increase was no doubt due to the Dot Com collapse but picked up considerably with an aggressive expansionary policy from the US Fed after 9/11.
Do we have anything like this in NZ?
NZIER economist Shamubeel Eaqub stated that the wage income gap between high and low income has been broadly stable over the past decade and there is nothing in the figures to suggest massive increases in inequality or inequity.
Another interesting graphic from the Begg Textbook. Comparative advantage need not depend on technology differences. It may also reflect different factor supplies. The US has more capital per worker than China. Even though China’s vast size may mean that it has absolutely more capital than the US, the US has relatively more capital than China. Where they is an abundance of supply of a variable factor (labour) it is relatively cheap and the opposite applies if the variable is scarce. Therefore labour intensive industries in China tend to be more competitive that similar industries in the US. The graph below supports this view. It emphasises skills, or human capital, rather than physical capital, although the two are usually correlated. Countries with scarce land but abundant skills have high shares of manufaturing in their exports. Countries with lots of land but few skills typically export base materials. The figure also shows regional averages. Africa lies at one end, the industrial countries at the other end.
A hat tip to colleague John Jackson for this amusing cartoon which shows the impact of low prices on the US labour force. Although prices of consumables maybe cheap there is the risk of your job being outsourced to another economy – eg China. The same happened when NAFTA (North Amercia Free Trade Agreement) came into operation – 70% of US TV sets were manufactured in northern Mexico.
Here is a great animated graphic that I got from a comment on the posting entitled “Distribution of Income – USA”.
The red line represents a graph of family income across the population. The height of the curve at any point is the height of a stack of $100 bills equalling that income.
- The family at the 50th percentile, the 50-yard line of the football field, has an income of $40,000 (A stack of $100 bills 4cm tall)
- The family on the 95 yard line earns about $100,000 per year, a stack of $100 bills about 10cm high.
- At the 99 yard line the income is about $300,000, a stack of $100 bills about 30cm high.
- The curve reaches $1 million (a 101cm high stack of $100 bills) one foot from the goal line.
- From there it keeps going up and at 50 kilometers, the pile of $100 bills extends beyond the stratosphere, more than 5 times the height of Mt. Everest.
Here is the link – just keep clicking Zoom Out on the site The L-Curve
With the new English Premier League soccer season upon us next weekend it was interesting to read in The Economist and the Finacial Times in London that there seems to a reverse in the trend of Brazilian players taking up high paid contracts overseas. This is partly due to the continuing strength of the Brazilian economy:
- In 2010 the economy grew 7.5%
- Is the world’s 7th largest economy
- Grew fifth fastest of the G20 countries
- Since 2008 the Brazilian Real has appreciated 35% against the Euro and the British Pound. Also this year it hit a 12 year high against the US$. This has helped clubs to bid for players from Europe.
- The Brazilian Terms of Trade has improved by 27%
In 2010 spending on players in Brazil rose 63% compared with a drop of 29% in Europe. Total number exported from Brazil fell 14% in 2009. The stronger finances of Brazilian clubs are also helping them retain younger players.
Rivalling those in the Premiership, La Liga, and the Serie A Santos, the team of Brazilian great Pele, repelled a reported Chelsea bid for Brazilian teenage star Neymar by offering him a sophisticated compensation package that included revenue from image rights. FT London
A hat tip to colleague Richard Wells for this piece from the Huffington Post. Research by economists from the University of California, Berkerly have shown that businesses don’t suffer from having to increase the minimum wage to their lowest-paid employess. In fact they believe that employers are actually better-off as with a higher minimum wage employees stay longer and become more experienced. This in turn should increase productivity and reduce the turnover cost.
For 10 years up to 2007 the federal minimum wage was US$5.15 but since then has increased to US$7.25, or about US$15,000 a year for a full-time worker. Economists argue that increasing the minimum wage will act as a stimulus to the economy. This is especially prevalent amongst the those low-wage families who depend on these earnings to survive. Therefore their marginal propensity to consume is very high and may even lead to job growth. Workers under the age of 25 account for approximately 50% of those making the munimum wage of less.
According to researchers the federal minimum wage from $7.25 to $8.25 would give a raise to 10 million workers, including many currently earning their state minimum wage. That could ultimately pump as much as $9 billion into the economy. At a time like this, there is nothing else putting upward pressure on wages. As the US economy remains in a stagnant position maybe this could be an option?
From the New York Times – Economix column – The US Tax Policy Centre has updated its figures on the income distribution in America, which showed why most rich people don’t feel very rich. They have now crunched income levels for every single percentile, and the numbers refer to 2011 rather than 2010.
Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich. In fact much of the rise in inequality over the last few decades has been because of the increasing inequality isolated among the very top members of the income distribution, as America’s wealthiest have pulled further and further away from their slightly less wealthy peers – see data and graph below.
50th and 51st percentile is $42,327 versus $43,564 = $1,237
98th and 99th percentile is $360,435 versus $506,553 = $146,118
99.5th and 99.9th percentile is $815,868 versus 2,075,574 = $1,259,706
Over the last couple of decades China has continued to produce goods with very low costs as hundreds of millions of low wage factory and urban jobs were absorbed by surplus rural farm labour. Another significant advantage has been the fact that China has kept its currency value low giving its domestic exporters a competitive advantage. However over the last year there has been significant pressure from Chinese workers in the form of protests and suicides. To overcome these problems the government has supported higher wages which in turn should boost domestic consumption and reduce the dependency on the export market.
But with greater domestic consumption comes inflation as Chinese workers are buying more with their higher salaries. And as the Chinese economy develops, resources like oil and other commodities will remain high. According to the Wall Street Journal:
Many analysts predict that China’s vast labor force will begin declining in the next year or two, the result of family-planning policies. Others say there’s already a shortage of the most active members of the factory floor, workers aged 15 to 34. That group has been steadily declining since 2007, according to Jun Ma, Deutsche Bank’s chief economist for Greater China. A shrinking work force will need higher salaries to support an expanding population of elderly.
A recent OECD Report states that in developed economies their richest citizens get quite a lot richer in the last few decades, leading to a widening income gap. The New York Times said that the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, with much bigger multiples in Israel, Turkey, the United States, Chile and Mexico. In these last two countries, the income ratio is 27 to 1. Notice that New Zealand has one of the highest increases in income inequalities.
What accounts for this rise:
* the highest-paid workers have acquired significant pay increases relative to the lower income groups.
* more developed countries countries have been sending a significant amount of their less-skilled jobs offshore, and this has displaced many lower-paid workers in developed countries.
* there have also been cuts in work hours (sometimes voluntary, sometimes not), disproportionately affecting lower-paid employees
* high skilled workers have benefitted more than low paid workers from technological change. Regulatory changes, like loosening protections for temporary (and less-skilled) workers and lower unemployment benefits, may have also had an effect.
Below is a video clip from Paul Solman of PBS News Hour looking at the inequality in American society. Income inequality has changed over time: today the richest 1 percent of Americans hold about 24 percent of U.S. wealth. But almost a century ago in 1915, that same top percent had 18 percent of the nation’s wealth. Economic inequality in America, widening steadily since 1980, grew during the financial crisis, with the top 5 percent of Americans owning 65 percent of national wealth by mid-2009, up from 62 percent two years before. The losers were the bottom 80 percent, whose share of wealth fell during the crisis. Nearly half had negative net worth by mid-2009.
A hat tip to colleague Richard Wells for this piece from the Curious Capitalism blog on the Time magazine website. The Wall Street Journal researched the pay of top CEO’s in the USA and found out that incentive payments increased by 30%. So much for the affect of the financial crisis on the bonus culture. The average worker now makes $40,672 a year. But factor in inflation, and the average worker makes just $0.58 more a week, than they did a year ago. Those justifying the CEO bonuses look to how well companies are doing on the stock market and also the bottom line. If this is the case for CEO’s why don’t employess also receive their fair share of the improved results of corporate organisations.
As long as it remains that only a small segment of our population will be rewarded for better performance, while the rest of us do more and more work for the same pay, the wealth gap in America is certain to get worse. Click here to see the full article