1. Özlem Onaran University of Greenwich
How to achieve a wage-led recovery? The prospects for growth with equality in a globalized economy
Özlem Onaran
University of Greenwich

2. Different Dimensions of Inequality
↑ in top income shares –“working rich“
Growing low wage/precarious workforce –“working poor“
The rise in personal income inequality is interlinked with functional income inequality
Real wages increasing at a lower pace than productivity
declining wage share
Global race to the bottom in the wage share in national income
In the global north as well as the south since the 1980s

3. Broken linkage between wages and productivity

4. Wage share in national income (1960-2013)
Global North
Wage share in national income ( )
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: AMECO

5. Wage share in national income (1970=100)
Global South
Wage share in national income (1970=100)
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012

7. Why is capital’s victory empty?
Financial Times on 2013, Hermes Investment Conference
Session: “Labour’s Uprising?”
1950s, Henry Ford II took Walter Reuther, the leader of the auto workers union to see his latest plant in Detroit.
...just after the United Automobile Workers had gained another big rise in pay and benefits for its members
The plant contained the first primitive pre-robots replacing workers in some jobs.
Ford asked Reuther pointing at the machines:
"Tell me Walter, how are you going to get them to join your union?"
Reuther replied:
"How are you going to get them to buy your cars?"
It takes two to tango!
Capitalism needs workers (wages) as much as capitalists (profits)

8. What is the problem? Effect of increasing profit share on growth?
Mainstream
wage=cost
positive effect on investment
Positive effect on exports
Puzzle: Why is growth in the post 1980s lower and more volatile despite a rise in the profit share in most countries?
Answer: Dual role of wages
Cost item
Source of domestic demand

9. Lower share of wages in national income (higher profit share) 
lower domestic consumption
The poor consume more out of their income than the rich
Workers consume a higher proportion of their wages than the capitalists consume out of their profits
2. A positive effect on private investment but only partial
Investment depends on profitability, but also demand
3. higher foreign demand (Net exports=Exports-Imports)
labour costs ↓  higher international competitiveness
if total effect is -: lower wage share  lower growth, fewer jobs
the economy is wage-led
if total effect is +: lower wage share  higher growth
the economy is profit-led
Mainstream policies assume all our countries, and the world as a whole is profit-led, and claim that we need wage moderation for higher employment

10. Inconsistency of the Macro vs. Micro rationale
Firm vs. aggregate/national
National vs. regional/global level
→race to the bottom in labour share
international competitiveness effects are eliminated
makes economies more likely to be wage-led

11. What happens when wage share↓? (Onaran & Galanis 2012, ILO)
The negative effect on consumption is larger than the positive effect on investment in both the developed and developing countries
→ Domestic economy (consumption+investment) is wage-led
Net export effects on growth not too important in large economies, where exports and imports are only a small part of total demand
→ large economies are wage-led
Global race to the bottom: a 1%-point fall in the wage share
global GDP↓ by 0.36%
Conversely a global wage-led recovery scenario:
Global GDP↑ by 3.05%,
Planet earth is wage-led, unless we trade with Mars!

12. How did the world grow despite declining wage share until the Great Recession?
Potential crisis of demand deficiency
The expected outcome should have been a stagnation of global demand and growth
This was mainly circumvented by two distinct growth models
a root cause of the great recession
Fragile → Great Recession

13. Policy Lessons
the limits of strategies of international competitiveness based on wage competition in a highly integrated global economy
↑wage share : egalitarian; does not harm growth potential
“The world needs a pay rise!”
Recovery needs a pay rise!
Wage/macro policy coordination
avoid beggar thy neighbor policies
Recovery led by domestic demand & ↑ in the wage share
a reversal of the ↑ inequality –a factor behind the crisis
+political and economic stability

14. How to achieve a wage-led recovery?
Fall in the labour share is not an inevitable outcome of technological change or globalization
Increase the bargaining power of labour
union legislation,
increasing the coverage of collective bargaining,
establishing sufficiently high minimum wages,
regulating high/executive pay
Bring the welfare state back
increasing the social wage via public goods and social security,
Reregulate finance / Reverse financialisation
Effects of wage-led recovery on growth and hence employment however is modest, albeit positive.
mobilize all the tools of economic policy with an aim to achieve full employment, ecological sustainability, and equality.
green and purple jobs

15. How to close the jobs gap?

16. For further information:
Onaran, Ö. and Galanis, G. (2012). Is aggregate demand wage-led or profit-led? National and global effects, ILO, Conditions of Work and Employment Series No. 31, Geneva.

17. Wage share in national income (1960=100)
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012

18. Wage share in national income (1970=100)
*Adjusted labour share= compensation per employee*Total employment/GDP at factor cost
Source: Onaran and Galanis 2012

19. Wage share vs. growth, EU15, 1960-2013
Wage share declined further in , pay freeze and austerity
→the biggest treat to recovery!

20. →globally lower growth, fewer and/or more precarious job creation
Average growth of GDP (%)

21. Global race to the bottom by 1%→ global GDP↓ by 0.36%
Source: Onaran and Galanis 2012

22. Two wage-led recovery scenarios
1. global GDP↑ by 2.81%
2. global GDP↑ by 3.05%
Planet earth is wage-led!

23. FT on ↓labour share: ”threat to recovery”
“The decline in the labour share, along with a shift of labour income towards higher earners, may be an important part of why the US economic recovery is so sluggish. Workers on lower wages consume much of their income, while higher wage earners and those with capital income are more likely to save.”
Robin Harding, “Pay gap a $740bn threat to US recovery”, Financial Times, December 14,