Friday, 22 July 2011

Thomas Palley on a global minimum wage system

Thomas Palley is Bernard L. Schwartz Economic Growth Fellow with the New America Foundation. This piece was originally published in the FT Economists' Forum. The proposal is drawn from his forthcoming book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economic Ideas, Cambridge: Cambridge University Press.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.

The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.

Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.

Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.

Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.

Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.

Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.

Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.

In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.


Paul Hunt said...

An excellently argued and thought-provoking proposition. Globalisation has provided mobile capitalists with an almost infinite supply of labour that they can exploit. Given the cost structures of developed economies they have bled labour dry in these economies and loaded workers with debt to compensate for the continous downward pressure on real wages. Having stripped the developed economies bare they are now, like a swarm of locusts, descending on the developing and emerging economies.

But is a universal minimum wage structure the answer? In countries where a minimum wage has been introduced, capitalists have responded by re-classifying many jobs that traditionally paid more than the minimum wage as work that only earns the minimum wage. So, as some workers have clearly benefitted by seeing an increase in their wages to the minimum wage level, others workers have seen their work devalued to the minimum wage level.

It is the old age problem of the infinite ingenuity of capitalists to evade and distort the thrust of public policy and to futher their own narrow interests when confronted with a good-intentioned, but blunt, policy instrument apppied in the broader public interest.

It's the usual dilemma. We can't rely on their enlightened self-interest - the days of Henry Ford who paid his worker enough to afford a Model T are long gone - but the imposition of universal minimum requirements seems to bring out the worst in them.

The answer, unfortunately, is in the long, hard, grinding, tedious effort to expand and enhance democratic governance that ensures that those capitalists pursuing enlightened self-interest earn the rewards while those who pursue narrow sectional greed and exploit political and economic power are restrained and punished.

But while there are those on the left who remain convinced that capitalism can and should be supplanted or superceded it will remain impossible to secure the popular consensus that is necessary to achieve this.

MIchael Burke said...

This idea is well-meaning. But it suffers from an essential fallacy,

"This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth."

There is no such thing as 'the over-pricing of labour'. Since all value is created by labour the maximum that can be charged by labour is 100% of the necessary time to produce that value.

In the advanced economies on average labour's income share of value created is abut 60%. This economy is much more exploitative and labour's share of national income is about 45%.

'Tying' wage growth to prodctivity growth simply ties wages to this wholly inequitable arrangement.