FT European Economics Commentary Martin Sandbu believes the COVID-19 pandemic is a once-in-a-lifetime chance to rebuild better economies that work for everyone. Sandbu author of ‘The Economics of Belonging’ – see previous post – talks here about the polarisation of rich societies since 1980. The main points of interest that he raises are below. Worth a look.
1980 – large number of jobs available in factories start to disappear.
Globalisation – not the main cause of unemployment but technology has taken a lot of the manual and clerical jobs (structural unemployment) and retail has gone online.
Tax systems have not redistributed income – unions have been in decline.
Rural areas worst effected – good jobs more prevalent in cities so rural areas suffer.
Low paid service jobs have been impacted by COVID-19. Also as they involve contact with others there is more exposure to the disease.
Pandemic catalyst for change. History tells us – US Great Depression = New Deal, 2nd WW = postwar welfare state.
Technology change is with us so the need to find new ways of working. Do we have a Universal Basic Income (UBI)?
Lower burden of employing workers – less income tax, payroll tax and generally make it cheaper to hire people in to better jobs. Make up the shortfall in revenue elsewhere.
With the significant increase in inequality – introduction of a wealth tax. Also a tax on carbon emissions and redistribute to help the worse off.
Greater need to overcome regional inequality within countries
Need to the political will to make economies work better for everyone.
Last Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.
“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”
Boosting the minimum wage is stimulatory
She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.
He-cession and She-covery
However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.
Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.
Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.
Over the last few years Chinese demand (or weakness of) has been the main cause of volatile commodity prices. Copper has been one of those commodities but supply factors have also been influential in pushing copper prices to their highest level in the last two years. Strikes and supply disruptions (see graph below) in two of the world’s biggest mines will have a significant impact:
Escondido in Chile (the largest in the world) and Grasberg in Indonesia.
Both mines account for 9% of mined copper supply. One-month shutdown at both mines removes 140,000 tonnes which equates to 0.7% of world output. In both mines labour contracts are up for renewal and they account for 14% of production. The video below from Al Jazeera looks at the strike action by miners at Escondido in Chile where workers are rallying against cuts to pay and benefits by owners BHP Billiton which are designed to improve productivity. However, in the last three years productivity in the mine is up 48% and the labour force has been cup by 17%.
Add to this more demand from China and there is only one way copper prices can go – it is up 20%. Resolutions to labour relations are needed in both Chile and Indonesia if supply is to be restored to pre-dispute levels. Furthermore the outlook for copper demand is strong with its importance to electric vehicles and wind and solar energy units. In the long-term, depletion of copper ores will also put pressure on prices northwards.
Source: The Economist 16th Feb 2017. Al Jazeera 23rd Feb 2017
Michael Cameron senior lecturer in the Department of Economics at the University of Waikato wrote an interesting piece on his excellent blog “Sex, Drugs and Economics.” The Los Angeles city council voted in May to raise the city’s minimum wage from $9 to $15 per hour. Initially trade unions fought hard for the increase in the minimum wage but they now want a change to the law that would exempt unionised firms from the new proposals – trade unions wanting lower wages? The Economist said:
Indeed, by exempting unionised businesses from the minimum wage, unions are creating more incentives for employers to favour unionised workers over the non-unionised sort. Such exemptions strengthen their power. This is useful because for all the effort unions throw at raising the minimum wage, laws for better pay have an awkward habit of undermining union clout. Britain’s minimum-wage law in 1998, for example, precipitated a decline in union membership. Once employers are obliged to pay the same minimum wage to both unionised and non-unionised labour, workers often see less reason to pay the dues to join a union.
In this case we have members of trade unions pushing up the wages of non-members but not their own wages. What are the benefits for the employer, union worker and non-union worker:
* Unionised employers will find that they labour costs will be lower than non-unionised employers
* Workers will be more likely to join the union if unionised employees are likely to be offered employment.
* Non-union employees receive the higher minimum wage.
As Michael Cameron said: So, if there are so many winners, who loses from this proposal? While some non-union employees may be better off initially (from the higher minimum wage), available jobs for these employees are likely to reduce substantially. Why would employers employ a non-union employee for $15 per hour, when they can employ a union employee for much less? So, non-unionised workers are going to be made worse off.
Associate Professor Bill Hodge of the University of Auckland gave a talk to the Remuera Rotary Club last month about union membership in New Zealand – see chart. It is interesting to note the big drop off in public sector and private sector union membership in 1991 and again in 2000 mainly due to the statutes in place:
– Employment Contracts Act – 1991
– Holidays Act and the Employments Relations Act 2000
The above Acts make many guarantees to employees based simply on the status of being in an employment relationship. Those guarantees, or minimum standards, are extended automatically to all employees – eg:
4 weeks’ paid annual holidays, paid statutory holidays or time and a half plus a paid lieu day, paid sick paid, paid bereavement leave, wages protection, minimum wages, parental leave, and especially, protection against arbitrary dismissal by the “unjustifiable dismissal provisions.
Nobody has to join a union to gain those statutory employment rights. Perhaps that may be the most lasting aspect of the Employment Contracts Act 1991, and the irony of a statute, regarded by many as anti-union, having its most lasting contribution to NZ Employment Law the extension of the statutory right against unjustifiable dismissal to all employees.
Just been teaching wages at A2 level which includes the impact of trade unions. This reminded me of a great sketch by the ‘Not the Nine O’Clock News’ team including Rowan Atkinson as the union representative. Although there are only photos in the clip the dialogue is very good.