Saturday, March 10, 2007

Growing Inequality in Developed Countries

The Top 0.01% Income Share and Composition in the US, 1916-2000
Note: The Figure displays the top 0.01% income share (top curve) and its composition
(excluding capital gains).
Piketty and Saez (2003, 2006)

The impact of growing inequality is getting serious attention in many Developed Countries.

Earnings are being squeezed despite a surge in corporate earnings.

Last year, the Washington D.C. based Economic Policy Institute (EPI), in an analysis of the Bureau of Economic Analysis March 2006 data, said that in the fourth quarter of 2005 corporate profits claimed the largest share of gross domestic income (GDI) in 37 years. The last time profits claimed this large a share of GDI was in the 4th quarter of 1968.


In Ireland, like France, there are Insiders and Outsiders. The former have done well from the temporary prosperity that has been fuelled by a surge in foreign direct investment in the 1990’s and a resultant property boom.

While the majority of Irish private sector workers have no occupational pensions, while in contrast, in addition to a pension that would cost 28% of annual salary in the private sector, Irish public service salaries have risen by 59% in the past five years and the payroll has expanded by 38,000 extra staff.

Increases in public sector over the period due to general rounds total €2,479m (or 24.3%), “special” pay increases (primarily Benchmarking) total €1,328m (or 13%), and other factors (such as extra numbers) total €2,193m (or 21.6%).

The increase in the average industrial wage for a male worker in the period 2001-2005, was 19% compared with 38% in the public sector, excluding additional staff costs.

The Exchequer’s annual wages and pensions bill increased sharply from €10.2 billion in 2001 to €16.2bn last year, with what has been termed "benchmarking" accounting for up to €1.32bn of the rise. The number of public servants grew by 38,760, or 18%, since 2001 to 257,013 to January 2006. The education sector saw the biggest increase with pay costs rising by 65%. Health sector pay surged by 63% in the period, civil service salaries rose 48% and in the security sector they rose by 34.8%.

Preliminary Central Statistics Office estimates of Industrial Earnings for September 2006 show that the average weekly earnings of Industrial Workers in All Industries increased by 3.5% when compared with September 2005.

Average weekly earnings in the Public Sector (excluding Health) rose by 4.2% in the year to September 2006. The index of average earnings, which excludes some effects of changes in employment composition, rose by 4.5% for the same period.

Irish Nurses are currently seeking a 35-hour week and a hike in pay as private sector jobs are increasingly under threat.

The Irish Government is expected to cave-in to the demands as it has in the past when the unionized public sector has threatened strike action.

Japan and Germany

Japan's national statistics office reported on March 2nd that inflation was zero in January, signalling the struggle to end a decade of deflation.

Core consumer prices, which exclude fresh food, were unchanged from a year earlier, the statistics bureau said.

Earnings have fallen the most in more than two years, according to a separate report, signalling the difficulties that the Bank of Japan has in raising its key interest rate from the lowest in the world at 0.5%.

Wages fell 1.4% in January, the biggest fall since June 2004, the labour ministry said.
A recent Japanese Cabinet Office survey showed that people felt a high level of anxiety about their daily —the highest angst level recorded since the poll began nearly 40 years ago despite a recovery in the economy.

Japan's economy has grown for 60 consecutive months, the longest period of growth in the postwar era. While unemployment has fallen from 5.4% in 2002 to 4.1% at the end of 2006, wages have not moved. Statistics published by the Ministry of Health, Labour and Welfare show that the average Japanese made $2,881 a month in 2002. For most of 2006, the average monthly wage was only $2,749.

Japanese companies have kept wages in check in part by shifting more work to part-time employees, who now constitute over 33% of Japan's workforce, up from 20% in 1992.

According to Time Magazine, in Spain, a study by the IESE business school last summer showed that household spending power has barely budged in a decade, even as the national economy grew by 3.8% in 2006.

In Germany, De Statis, the Federal Statistics Office reported last month that German wages posted the smallest rise in 2006 since the office first began reporting on pan-German wages in 1995. Wages rose 1.2% last year, lower than the 1.7% rate of inflation.

In contrast with the protected Irish public sector, hardest hit were government and municipal employees (a category that includes police, fire fighters and teachers), and workers in the building sector, whose hourly wages fell 0.8% and 0.2% respectively as a result of working longer hours for the same wage. Add to that a variety of price increases — in January, value-added tax rose to 19% from 16%, and health insurance premiums rose — and the combination stokes growing anger.

Germany's powerful IG Metall union, which dominates the automotive, machinery and steel industries, is seeking a 6.5% wage hike — almost quadruple the inflation rate.

"Shareholder profits and management salaries have been rising a lot faster than the wages of factory workers in this country. There are high expectations among the rank-and-file. I think we're going to have a wage round with a lot of conflict," says Hartmut Meine, the IG Metall official for car group Volkswagen, according to Time Magazine.

Martin Kannegiesser, head of the metal industry employers' association Gesamtmetall, expects the pace of industry growth to slow this year. "We are in a phase that demands moderation," he says. "Wage policies can not be allowed to drive our prices sky high on world markets, otherwise the economic recovery will come to an end."

According to a poll published by the Ard public television network on Feb. 1st, just 22% of Germans questioned said they felt they would personally benefit from the economic recovery, compared with 74% who said they wouldn't. When asked about IG Metall's wage demand, 44% said it was appropriate — and 5% even said it was too low.

US Inequality

President Bush acknowledged on January 31st that there is growing income inequality in the United States, addressing for the first time a subject that has long concerned Democrats and liberal economists.

"The fact is that income inequality is real -- it's been rising for more than 25 years," Bush said in an address on Wall Street. "The reason is clear: We have an economy that increasingly rewards education and skills because of that education."

In three separate Congressional hearings on the same day, Democrats probed the causes of middle-class angst, focusing on rising income inequality. Meanwhile, the Senate separately has taken aim at executive compensation, adding a provision to the minimum-wage bill that would limit the ability of executives to amass millions of dollars in tax-deferred accounts.

In his remarks, Bush also said that the "salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders." While Bush said the government should not set compensation, he told business executives that they "need to pay attention to the executive compensation packages that you approve."

The gap between rich and poor has been growing wider since the 1970s. According to the nonpartisan Congressional Budget Office, the wealthiest 20 percent of households accounted for 45.4 percent of total US income in 1979, but claimed 53.5 percent in 2004. Households in the bottom fifth dropped from 5.8 to 4.1 percent over the same period.

"Sometime in the 1970s, the market turned ferociously against the less skilled and the less educated," Alan S. Blinder, a Princeton University economist and the former vice chairman of the Federal Reserve Board of Governors told a hearing of the congressional Joint Economic Committee.

But that is likely to change in the future, he said, as globalization and technological advances begin to trigger the same kind of upheaval in the service sector as has hit manufacturing.

Bush in his speech promoted the No Child Left Behind Act. He described the bill as "one of the most important economic initiatives" of his presidency because of its role in closing what he terms the "achievement gap" between students.

"The question is whether we respond to the income inequality we see with policies that help lift people up, or tear others down," Bush said. "The key to rising in this economy is skills -- and the government's job is to make sure we have an education system that delivers them."

American economists Ian Dew-Becker and Robert J. Gordon distinguish two complementary explanations, the "economics of superstars," i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers.

These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.

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