Sunday, November 6, 2011

The Great Wage Stagnation

The financial crisis and consequent Great Recession has re-ignited an intense debate about whether western capitalism is facing a crisis.

In a much read and debated e-book, Tyler Cowen has argued that the modern economy suffers from a deficit of truly great innovations, ones that dramatically improves the quality of lives and creates large numbers of jobs. He has also claimed that growth is slowing because economies have already gotten most of the innovative benefit out of previous big leaps and are now squeezing out more marginal gains.

Such trends are not exclusive to technology. There have been numerous studies which have pointed to disconcerting trends in the labour market. In the latest, Economix points to a new report from the Resolution Foundation, a British research organization, that examined trends from 10 rich countries over the 2000-07/08 period and finds weakening relationship between workers incomes and economic and productivity growth. Here are some of the findings from the report.

1. The growth rate of median pay versus economic growth per capita from 2000 to the start of the Great Recession for these ten countries indicates that wages have more or less stagnated in many countries and have lagged behind GDP growth rate in all these countries.

2. The authors represent the changing dynamics of relationship between GDP and wages using the graphic below which removes subsidies and taxes and focuses on production at basic prices or Gross Value Added (GVA) by any unit of labour engaged in economic production in both private and public sectors. It illustrates the movement from GVA at the economy wide level to the wages received by individuals as a three stage process.

3. In all these countries, the share of wages as a proportion of all employees compensation has been fallin, with the decline picking up in the last decade. Interestingly, during the same period, the proportion has either remained stangnat or even moved up in Germany, France, Sweden, and Finland.

4. The summary of findings are captured in this table. (Click on image to enlarge)

1 comment:

Money Varta said...

the arguments that you put are reasonable and rationale. To some extent I do agree with you about the impact of innovations on the economic activities in any economy. But at the same time when there are huge fiscal deficit in almost every economy in the current world. There has been huge expenditure cuts on social causes in many countries in names of deficit management. Do these practices have any positive impact on employment conditions? I think no, So how come innovation can be that much important?