The race to the bottom in the global worker wages could eventually lead into an economic depression because it could drive the consumer demand way too low which would not be able to be offset by loose credit says the UN’s International Labour Organization (ILO).
“There is also a problem of collective action: while each individual country may in principle increase aggregate demand for its goods and services by exporting more, not all countries can do so at the same time. The world economy as a whole is a closed economy. If competitive wage cuts or wage moderation policies are pursued simultaneously in a large number of countries, competitive gains will cancel out and the regressive effect of global wage cuts on consumption could lead to a worldwide depression of aggregate demand,” says the report.
Wages now account 43% of the GDP, a 10% drop since 1970, while corporate profits doubled to 12% of GDP since 2005.
While wage drop trend looks sustainable on the downward course that could be further stumulated by more stringent “right-to-work” laws, it is less likely, however, that corporate profits could register another 100% gain in next 7 years, and this can have an impact on the stocks.
Austerity is but one example of the longer road of deliberate policy to accrue an ever larger share of productivity gains onto corporate profits ledger thus delinking wages from productivity gains.
“Since 1980 hourly labour productivity in the non-farm business sector increased by around 85 per cent, while real hourly compensation increased by about 35 per cent,” notes ILO.
Full report here.