Global Crisis: Crisis of distibution

and the Distributional Effects

Özlem OnaranVienna University of Economics & Business

“Wage share, globalization, and crisis: The case of manufacturing

industry in Korea, Mexico, and Turkey,”

International Review of Applied Economics, 2009 23(2): 113-134“From the crisis of distribution to the distribution of the costs of the crisis: What can we learn from the previous crises about the effects of the financial crisis on

labor?”

Political Economy Research Institute, University of Massachusetts Working Paper 195,

2009, http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151-200/WP195.pdf

Global crisis

2007-? =Crises

of the

neoliberal paradigm

=Crisis

of distribution•

Capitalism‘s

answer

to its

crisis

in the

1970s:

–

Deregulated

global capitalism, neoliberal macroparadigm•

labor

markets, finance, international trade, capital

flows

•

Policy

target: low

inflation

instead

of full

employment

•

Pro-capital

redistribution

of income

& power•

“race to the bottom”

in labor share in both developing &

developed countries

•

Credit and consumption-led

growth•

Global imbalances↑–

Current

account

deficit

in the

US

–

Low

domestic

demand

in Germany, Japan, current

account

surplus–

Developing

countries

accumulating

reserves

after

the

Asian

crisis,

China

Figure 1a: Adjusted wage share, total economy, EU & US (1960‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)

50

55

60

65

70

75

801960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

European Union (15 countries)

Germany

United Kingdom

United States

Structure of the presentation•

Different countries, different crises

•

Former crisis, unemployment

& distribution–

Developing

countries

•

Model & estimation

results–

Japan

•

Possible effects of the recent global crisis–

Developing

countries

–

Eastern Europe–

Developed

countries

Different countries, different crises•

Developed countries–

fiscal capacity to better weather the shock

–

policies that were denied to the developing countries!•

immediate decline in interest rates, credit lines to domestic banks , considering counter-cyclical fiscal policy

–

less severe at the beginning compared to former crises in the developing countries, but might persist & deteriorate

+long recession →deflation risk?•

L-crisis?

…Different countries, different crises•

Developing countries –

No more resilient to crisis, no more “safe”, not de-coupled

•

+ capital

is

flowing

back to US!–

Developing countries with a former crisis history

•

Fragile countries: Countries dependent on capital flows: –

Turkey, South Africa

•

Countries less dependent on capital flows: Korea, Mexico, Brazil, Argentina(?) suffering from a crisis, which they have not created

–

Eastern Europe: dependent on capital flows–

China, India…

•

Developing

countries, in the

1990s-2000s –

Capital outflows

/currency

crisis

(depreciation) + financial

crisis

/

credit

crunch–

Dependence

on capital

inflows

→ dramatic

recession

•

GDP↓

by

7-10% in the

past, unemployment

hikes+currency

crisis: heavier

distributional

effects

–

import dependency→ pass-through → dramatic inflation –

hard

for

the

workers

to

reflect

to

their

wages

Crisis

now

& then: Periphery•

A boom-bust

cycle

was unavoidable: It

did

happen

again…

•

Difference: a global vs. regional crisis–

Originate

from

the

core

& spread

to the

periphery

–

Global credit

crash!–

Export market

contraction

•

Depreciation

does

not

help, only

negative balance

sheet

effects•

Debt-led

consumption

growth –households

–

HU, Ro, Cr, also Po high household

debt

in FX•

when

& how

will the

recovery

come from?

•

But

slower

building

up of the

currency

crisis–

10-30% depreciation

–

Fixed

pegs

still holding

in the

Baltics

& Bulgaria–

Contagion

but

not

total breakdown

•

Lower pass through to inflation than in previous crises? –

Global deflation

–

Commodity prices–

But: is depreciation wave over?

–

Russia:persistently

high inflation, 14%

Labor’s share, %, 1970-2003 (Wage/Value added, Manufacturing Industry)

Past

Crisis

in the developing countries: not neutral with respect to classes

•higher

fall in wage share

than

in output•persistent

post-crises

fall in wage share

9

A Model of Distribution• Conflicting claims model, open economy (Arestis 86, Rowthorn 77) • Wage bargaining: Labor market, macro, expectations, indexation

e

t

e

tttt prodpmacrobnbebbw 2110 Price (p) setting by firms (Sylos-Labini, 79)

– imported inputs → pass through effect of depreciation (x) 121 tttt xixiwsmp

• Labor demand (e): function of output and labor costs(?) 1431210 ttttt wsewseyeyeee

• Productivity (prod): pro-cyclical function of output ttt eyprod )1(

• Effects of neoliberal globalization: intensified conflict? – Global: International trade & FDI (↑fall back option of capital) – Domestic: Government’s expenditures (↓fall back option of

labor) Reduced form for the wage share (ws) to be estimated

tttt prodpwws

10

Specification

of the

equationDependent

variable:

percentage

change

in the

wage share

in manufacturingExplanatory

variables:

Basic model

(wage bargaining

+ conflict

inflation)growth of manufacturing

value

added

t & t-1

+interaction

dummy=growth*recessionnominal depreciation

t & t-1

lagged

wage shareMacro

variables

d(export/value

added

in manufacturing) t-1 & t-2d(import/value

added

in manufacturing) t-1 & t-2

d(FDI/GDP) t-1 & t-2d(government

final consumption

expenditure/GDP) t

11

Econometric

methodologySeemingly Unrelated Regression (SUR)

•

cross-country heterogeneity•

correlation of the country specific residuals

across countries captures common shocks; e.g. the Asian crisis.

•

The data on distribution –

confidential secrets of states?

–

Manufacturing data only, OECD

Estimation results: change in the wage share

Distribution & the crisis: Developing Countries & the East?

•

Contraction of output–

labor demand

–

decline in the bargaining power of workers–

compulsory unpaid leaves to avoid job losses

•

Mex: always pro-cyclical•

Tur: pro-cyclical during a crisis, counter-cyclical during normal years

•

Nominal depreciation: currency crises–

Inflation?

–

Negative effect of 1% depreciation: ranging between -0.14 in Mexico to - 0.27 in Turkey

(Onaran, 2009)

–

Lower than in previous crises? •

is depreciation wave over?•

Persistence of the decline: hysteresis

effect

•

a radical restructuring, which could not be achieved via a democratic process under normal economic circumstances–

e.g. South Korea, Turkey

•

Government expenditures: +, but they do not increase during a crisis in the DCs

•

2009: As of now

no real wage deterioration

except

for

Baltics

due

to low

inflation; declining

productivity, counter-cyclical

wage share

–

Yet!

Japanese Slump•

Differences to the developing countries:–

Deflation, not inflation

–

the duration and the size of the shock: •

developing country crises: the recession is very deep, but often one year long

•

the Japanese slump: the initial shock to growth was moderate, however the recovery took more than a decade.

–

wages•

developing country crises: sharp decline

•

the deflationary crisis: moderate real wage declines or even some minor increases particularly in years of deflation.

•

However, the cumulative effect is in both cases a dramatic pro-capital redistribution

Figure 1b: Adjusted wage share, total economy, Japan (1960‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)

60

65

70

75

80

85

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Japan

Japan

The

distributional

effects

of the

crisis

in the industrialised

countries, when

nothing

changes…

•

The

deflation

of the

asset

prices

→ „more

equal

distribution“?–

No: Concentration of ownership of capital↑

–

The power of the “wealthy”

is not affected –

policy measures in line with what the wealthy want; state as an economic partner; the bank

rescue

package

without

conditions.

»

Profits were

private, losses

are

socialized!•

Unemployment↑: Pressure

on wages

–

First unskilled, temporary

workers, but

later

also skilled–

May be

not

soon

in early

2009, but

later

pressure

on the

wage share

–

An extention

of income

inequality–

Some

firms

will use

the

crisis

to legitimize

their

LR strategy

•

Export-oriented

countries‘

(e.g. Germany, Austria) curse: Export dependency

and low

wage strategy

–

Time to stimulate

domestic

demand

via higher

wages•

The finance of the package : future cuts in social expenditure, education, health, childcare, elderly care, manucipal

servies, infrastructure

Conclusion

•

The

unequal

distribution

of income

and power

is

an important

reason

behind

the

crisis•

When

nothing

changes, the

costs

of

adjustment

after

the

crisis

may

lead

to further

deterioration

in labor

share

in both

the

developed

and developing

countries.

Figure 1 d: Wage Share in Manufacturing Industry, Indonesia, Malaysia, Phillippines (1970‐2003, %)   

0

5

10

15

20

25

30

35

40

45

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

INDONESIA

MALAYSIA

PHILIPPINES

THAILAND

Figure 1 e: Wage Share in Manufacturing Industry, Argentina, Brazil (1970‐2003, %)  

0

5

10

15

20

25

30

35

40

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

ARGENTINA

BRAZIL

Figure 2a: Unemployment rate, Selected Countries in South‐East Asia (1980‐2007)

Figure 2b: Unemployment rate, Selected Countries in Latin America and Turkey (1980‐2007)

Source: ILO online database on he Key Indicators of the Labour Market (KILM)

0

2

4

6

8

10

12

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Indonesia

Korea, Republic of

Malaysia

Philippines

Thailand

0

5

10

15

20

25

Argentina

Turkey

Alternatives•

Stimulus Plan•

Public employment

–

Prevent firing

•

Tax reform •

Wealth tax, heritage tax, higher corporate tax, progressive income tax, taxation of financial transactions

•

Cuts in taxes & social security contributions for the low wage groups

•

A large non-profit

oriented

public

banking

system+ participation

of the

workers, stakeholders, and transparency

•

A new

socio-economic

paradigm: –

full employment

& productivity-led

wages

•

Capital controls•

A new global monetary regime

–

fixed exchange rates without currency hegemony •

Trade & industrial policy consistent with development

•

International lender of last resort; Bail in! Not bail out!

Alternatives: Stimulus Plan•

Public employment

•

Labor intensive public services, Infrastructure•

Green investments

•

Prevent firing•

No firing in firms that can pay high dividends and managerial wages

–

Campaign, legal change?•

Credit as condition for banks that receive money from the rescue

package–

Condition for the firm: no firing

•

Automative

industry etc: –

Bofinger, Germany: short run nationalization

–

Then restructure, social-ecological reconstruction

•

Tax reform: •

Wealth tax, heritage tax, higher corporate tax, taxation of financial transactions

•

Cuts in taxes and social security contributions for the low wage groups

Alternatives: Finance•

No banks

that

are

„too

big

to fail“

–

break

into

small

banks–

Strong

and extensive regulation

•

No finance

from

the

capital

market•

A large non-profit

oriented

public

banking

system

–

Historically

regional banks, development

banks, Genossenschaftsbanken

–

European Investment Bank+ participation

of the

workers, stakeholders, and

transparency

Alternatives:

Global Policy

Coordination•

Beyond just a new “Bretton

Woods”

•

A new

socio-economic

& political

paradigm: –

full employment

& productivity-led

wages

–

Redistribution of income

& power•

National: an increase

in labor‘s

share

•

International: progressive global tax & investment•

Capital controls–

Tobin tax

–

Tax on all financial

transactions–

Shut-down

off-shore

tax heavens

•

a new global monetary regime with fixed exchange rates but without currency hegemony

•

Trade & industrial policy consistent with development•

International lender of last resort; Bail in! Not bail out!

•

Even EU could do a lot!

Figure 3: Labour productivity and real compensation rate, total economy, JapanAnnual % change (1971‐2008)

Source: OECD Economic Outlook

‐2

0

2

4

6

8

101971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Labour productivity of the total economy

Real Compensation rate ‐total economy

•real wage declined moderately (1992-93, 1997-99), slight recoveries in 1994-96. •mostly %Δwage< %Δproductivity. •nominal declines in the wages (1998-99, 2002-04, 2007) & wage freezes (2000, 2005-06, 2008) •The firing of many workers in the first half of the 2000s •the institutionalized wage co-ordination mechanism was almost broken down (Uemura, 2008). •against labor hording, the number of non-regular workers increased dramatically; •a shift towards unstable services jobs •bargaining position of unions weakened

Japan

•Long term unemployment ↑: 0.3% in 1992; 1.7% in 2003 •the incidence of long term unemployment unemployment

↑

: 33.7% in 2004 (persons

unemployed

for

1

year

or

beyond/total

unemployed)

the discouraging effect of the crisis

JapanFigure 4a: Employment, Japan (in thousands, 1980‐2007) Figure 4b: Unemployment, Japan (%, 1980‐2007)

Figure 4c: Labor force participation rate, Japan (%, 1980‐2007)

Source: ILO online database on he Key Indicators of the Labour Market (KILM)

54000

56000

58000

60000

62000

64000

66000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

0

2

4

6

8

10

12

14

elderly male

youth‐male

total

57

58

59

60

61

62

63

64

65

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

drastic increases in unemployment radically changed the industrial relations & wage bargaining process

Eastern Europe•

From soft to hard landing?

•

the slow down in global demand, the decline in FDI inflows, the contraction in remittances, credit crash, capital outflows

•

possible currency crisis + banking crisis. –

Correction of major imbalances: current account deficits & appreciated currency, pegs, housing bubble, credit boom

•

private indebtedness, in particular in foreign currency •

Reliance on mature market parent banks:

–

Market vs. parent bank finance?–

Parents cut lending–

Advantage or too small or too big to save?•

Hungary: Can IMF & ECB now make a difference?

–

Bail out (Asian) or stabilize & just postpone the problem –IMF policy: cut budget; in the meantime unemployment…

•

Pegs: Baltic Countries, Bulgaria•

Romania until now more exposed

•

Serbia, Croatia, Ukraine: non-member states? Bail out? Asian experience•

Poland, Czech Republic, Slovenia, Slovakia (auto) might suffer from the contagion effects as well as slow down in global demand

•

Russia: high exposure despite high reserves; share↓, collaterals ↓

•

Appendix

Figure 1f: Adjusted wage share, total economy, Eastern Europe (1990‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)

0

10

20

30

40

50

60

70

80

90

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Czech Republic

Hungary

Poland

Slovenia

Slovakia

Figure 1g: Adjusted wage share, total economy, South‐Eastern Europe and Baltic Countries (1990‐2008, Compensation per employee/ GDP at factor cost per person employed, %)

0

10

20

30

40

50

60

70

80

90

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Estonia

Latvia

Lithuania

Bulgaria

Romania

OECD 07

Developed countries: Labor share↓

Ratio of wages

of the

10% highest

paid

over 50% lowest

paid

workers

OECD 07

21%↑

Wage share

in the

East↓

(adjusted)

Onaran, AMECO