Commentary Type

Dr. Adam Posen Discusses the Meaning of Inclusive Capitalism

Published by the Huffington Post


If you were to go out into the streets in many of the places where you invest and do business, and ask people "what does inclusive capitalism mean?" they would probably not speak about short-termism of institutional investors driven by ratings agencies. And they probably would not speak about environmental sustainability for the next 100 years, either (even if we would want them to). More likely, they will ask: "Why don't people like me get a fair share? Why aren't I getting paid enough?" We have to address that.

The word "workers" seldom arises in our discussions of inclusive capitalism. As an economist, and as someone who hangs out with business people, I fully understand why that is the case. But if we are talking about inclusive capitalism and the words "workers" and "pay" don't come up, this is a problem. If we want to be honest, we must admit that some of the people in this inclusive capitalism movement are concerned more with protecting themselves and their businesses from political attack or overregulation than they are with long-term returns and sustainability, or with broader morality. But if that is the goal, then there is even more reason to be responsive to issues around the treatment of workers.

“Most medium to large companies are not on a knife's edge with respect to labor costs.”

We have to be aware of just how big a shift there has been in shares of income from labor to capital. You can break down every economy into the share of national income that goes to ownership (dividends, interest, etc.) versus employees (wages, bonuses, etc.). Over the past 15 years in the United States, the share of national income going to capital has continued to increase, by 7 percent of GDP, cumulatively, over the period. That's equivalent to about $1.7 trillion extra going to capital rather than labor every year.

This trend has lasted through the global financial crisis and the boom years preceding it. In fact, the labor share in the United States has been declining for roughly 40 years (interrupted by a few years in the late 1990s internet boom and Clinton-era policy changes, only for the trend to return with the bursting of the bubble in 1999).

The same trends have been visible in the euro area, though the rise has been a little less steep. Since we know that business revenues went down an awful lot during the crisis, and we observed that profits remained largely stable in euro terms, it is clear that most of the adjustment was done by labor. Greece, Spain, Italy, Portugal, Estonia, and Latvia—all the countries doing internal devaluations—saw wage cuts of 25 to 30 percent at the same time that unemployment doubled on average: When times got hard, it was labor that took the hit.

Indeed, the trend has been the same for pretty much every advanced economy. Recent data from the Organization for Economic Cooperation and Development show that even countries that we normally think of as leaning against major moves in inequality—such as Sweden, Germany and Japan—show similar declines in labor share.

It is important to recognize that most medium to large companies are not on a knife's edge with respect to labor costs. This fact sometimes gets lost in the public debate. Were an employer to incrementally increase wages, it is not as if the company would suddenly fall out of global competition. In recent Peterson Institute work, supported by the ERANDA Foundation, we showed that some of the most successful exporting countries (such as Belgium, Finland, Germany, and the Netherlands) pay their lowest-skilled and lowest-paid workers the highest wages, relative to other countries. Furthermore, these countries tend to have higher labor force participation; invest in workers more, pay more, and you get an equilibrium with a higher demand for and supply of lower-skilled workers.

Many of us tend to think that wage trends are determined by very large, impersonal forces such as globalization and the impact of automation on low-skilled labor. We end up thinking that lower pay is really nobody's fault, that it is not due to the conscious decisions of employers. The evidence suggests, however, that there is more room for both employer and national policy choices about these pay scales than we might think.

Furthermore, as a political as well as a moral imperative, can we allow these trends to continue? Instead of just accepting their efforts around corporate social responsibility (CSR), we really need to ask companies to adjust their models so that they "do well by doing good" for workers in terms of pay, benefits, and training.

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