Wednesday, May 25, 2011

Global Low Wage Growth: Some Evidence

I don’t think I’ll take this as proof positive that labour compensation has lagged productivity globally but Dani Rodrik sends us to an interesting paper from (excerpts from the introduction):

In the three decades after World War II, a central feature of the American economy was a mass upward mobility in which each generation lived better than the last, and workers experienced earnings gains through much of their careers…The central drivers of mass upward mobility were real wages for most workers that grew in line with overall labor productivity…

…The alignment of wage growth and productivity growth resulted from two main factors: labor markets for most groups of workers in which demand matched supply, and the post-World War II Social Compact that emerged from the Great Depression helped to propogate [sic]wage norms throughout the economy, norms that were enforced in part through collective bargaining and professional personnel/human resource management practices.

By the 1980s, both of these factors had reversed. Labor demand increasingly shifted toward more educated workers – particularly well-educated women. At the same time, the post-war Social Compact was challenged by the inflationary 1970s and collapsed in the 1980s. Nothing has emerged to replace it.

Now, in the absence of a labor market boom like that of 1996-2000, increased labor productivity no longer translates into rising real wages for many groups of workers…

I’ll admit to some fascination with the premise. My reading suggests that what’s happened in America has really been a global phenomenon, partly driven by the increasing integration of low-cost emerging markets into the global supply chain. And I more than suspect that the same drivers of low wage growth are alive and well in Malaysia.

Having said that, I do have problems with this paper – as a policy document, the intent is obviously a one-sided advocacy of labour activism and government intervention. I’ve no problem with that approach, as far as it goes. But the problem of low wage growth itself is not examined with any scientific objectivity as the underlying factors behind the problem are assumed, not inferred. That substantially weakens the force of the argument, and undercuts the validity of the remedial measures proposed.

Or maybe I’ve been reading too many academic papers lately.

In any case, the document is well written, and contains some thoughtful arguments. Some of the measures proposed could be a useful guide to labour policy in Malaysia.

Technical Notes:

Kochan, Tom and Frank Levy, “Addressing the Problem of Stagnant Wages”, EPRN, March 2011


  1. Dear Hashim. Just came across your interesting blog. Thank you for sharing your posts.

    Machin ( attributes rising wage inequality in the United Kingdom to "skill-biased technological change", and points to changes in labour market institutions (decline of unions and national minimum wage) to explain "lower tail inequality". But trade with poorer countries do not seem to be a factor, at least in the UK.

    In general, it seems preferable to rely on labour market institutions to promote a more equal distribution of labour productivity than
    to rely on the tax-transfer system. My (non-expert, non-research based) take is that the Anglo-American corporate model unnecessarily concentrates the payoff from labour productivity to executives close to the top of the corporate hierarchy. It seems worth exploring alternative forms of labour participation in an enterprise. The union-based adversarial model seem to have passed its use-by date. Recent reforms in Australia have moved to giving shareholders more say over CEO remuneration.

  2. Kien Chong,

    Thanks for the link. And your comments. I'm looking at taxes as an alternative to stronger unions, because of the risk of "capture" by union officials - the "some are more equal than others..." problem.

    But you're right, there are a lot more solutions that are available than just taxing capital. The paper actually mentions strengthening capital income compensation for employees (i.e. profit sharing), which is probably a better, more productive avenue for reducing inequality. I see I still have a lot of thinking and learning to do...