Possible causes of decreasing wage ratio. How to overcome the phenomenon? László György, PhD Assistant Professor Budapest University of Technology and Economics Chief Economist Századvég Economic Research Institute Ltd. 1

Structure 1.Trends 2.Causes 3.Policy solutions 4.The case of Hungary 2

Productivity – real wage gap (US) 3 Trends

Change in wage share, percentage points ( ) Source: Ameco 4 Trends

Current situation in the EU (%, 2015) 5 Source: Ameco Trends

Roots and causes of decreasing wage share 6 Structural changes between sectors Technology Decreasing bargaining power Institutional changes Globalization Causes

Structural changes between sectors Most of the fall in the labour share was the result of falling shares within industries (ILO, 2010); 7 Source: Causes

Technology Still there are unanswered questions: why countries that are relatively similar from a technological point of view differ in the scope of the decline? 8 Source: Using less labor and more capital, and develop new labor-saving technologies (OECD, 2012, 2015; Karabarbounis and Neiman, 2014; Bentolila and Saint-Paul, 2003 and more…) Causes

Globalization – trade and production Production and trade: pressure on wages, significant negative effect (Stockhammer, 2012; OECD, 2015) Wage share and trade openness in Europe ( ): 9 Source: Ameco, World Bank Causes

Globalization – capital liberalization, financialization Financial markets: influence businesses to increase shareholder value (OECD, 2015) leads to Short term focus instead of long term sustainability Lee and Jayadev (2005): – capital account liberalization reforms increase inequality – little evidence that capital account liberalization can spur growth 10 Source: Causes

Globalization – structural differences between developed and developing 11 Causes GDP-GNDI gap for Hungary GDP GNDI 6-7% Gap!

Institutional changes – consequence of globalization(?) Labor market institutions – E.g. trade union density and coverage (  ) Government presence and ownership in the economy (  ) Size of the welfare state (  ) – Minimum wage (  ) – Unemployment benefits (  ) Fiscal consolidation in 17 OECD countries over the period had distributional effects by raising inequality and decreasing labour income shares (Ball et al., 2013) 12 Causes

In numbers (Stockhammer, 2012) 71 countries (28 advanced and 43 developing and emerging economies) from 1970 to 2007 Question: What caused the 9,4 percentage points average decrease? Result of the fixed effect model for the advanced countries Contributions to the change in the wage share for advanced countries, 1980/ /4: 13 Causes

Policy tools to increase labor share Labor market institutions – Employment protection – Widening of trade union coverage and increasing density Social transfers – Pushing up minimum wage Increasing employment and activity rates Government involvement in the economy – Government consumption – State ownership in Critical Infrastructure Tax policy – Redistribution of wealth from oligopolists towards labor International cooperation – Internationalization of labor unions – Mitigate ‘race to the bottom’ – tax cooperation, eliminating offshore states Competitive exports – From the end to the beginning of the value chain with R&D – High added value  less price sensitivity  less wage competition 14 Solutions

Case of Hungary: Employment: -30% Net real wage total: +28% GDP per employed: 300% Hungary

The Hungarian attempt: Income redistribution from large global to small local players Employment protection: Job Protection Action Plan Increasing employment rate (9%) ( increase in employment) Minimum wage increase (real terms: 14% increase) Tax policy – Redistribution of wealth from oligopolists towards laborers and families: (real terms: 10% increase) 16 Large monopolist and oligopolist players (utilities, financial, retail, telco) Overhead cost reduction Additional 4,3% real wage increase for average families more than 2% of GDP Hungary

Marginal tax wedge at average wage 17 Hungary Source: own editing based on OECD data 71% 49%

Closing remarks 18 Methodology Focus on net real wage not on gross wage ratio Focus on net real wage/GNDI (not GDP) Practice (2%), be brave: tax oligpolist and monopolist capital; and decrease tax wedge (4%), increase employment, decrease inactivity (2%), eliminate the discontents of globalization, above all offshore (BEPS) build your own high value added economy (close the GDP/GNDI gap)

Thank you for your attention! 19 László György, PhD Budapest University of Technology and Economics

References Lavoie, M.-Stockhammer, E. (2012): Wage-led growth: concept, theories and policies. Conditions of Work and Employment Branch. ILO, Geneva. OECD (2015): The Labour Share in G20 Economies. International Labour Organization. Organisation for Economic Co-operation and Development with contributions from International Monetary Fund and World Bank Group. Report prepared for the G20 Employment Working Group Antalya, Turkey, February. Kristal, T. (2010): Good Times, Bad Times: Postwar Labor’s Share of National Income in Capitalist Democracies. American Sociological Review. 75(5) pp. 729–763. György, László: Offshore – van megoldás május Lee, K. – Jayadev A. (2005): Capital Account Liberalization, Growth and the Labor Share of Income: Reviewing and Extending the Cross-country Evidence. In: G. Epstein (ed.): Capital Flight and Capital Controls in Developing Countries. Cheltenham, Edward Elgar, pp Bentolila, S.-Saint-Paul, G. (2003): ‘‘Explaining Movements in the Labor Share.’’ Contributions to Macroeconomics 3: Article 9. Ball, L., Furceri, D., Leigh, D., and Loungani, P. (2013): The distributional effects of fiscal consolidation. IMF Working Paper, Washington. International Labour Office (2010): Global Wage Report 2010/11: Wage policies in times of crisis (Geneva). Organisation for Economic Co-operation and Development (2012): Employment Outlook 2012 (Paris). 20