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Labour Last Updated: Apr 20, 2017 - 10:59:34 AM


Globalization and the End of the Labor Aristocracy
By Jayati Ghosh, Dollars and Sense April 17, 2017
Apr 18, 2017 - 8:22:08 AM

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Imperialism has changed form, which has tremendous implications for workers worldwide. Sadly, this hasn't yet created conditions for international solidarity but the potential exists. The new situation requires new and more relevant economic models of socialism to be developed, if they are to capture the popular imagination.

Twenty-first century imperialism has changed its form. In the 19th century and the first half of the 20th century, it was explicitly related to colonial control; in the second half of the 20th century it relied on a combination of geopolitical and economic control deriving also from the clear dominance of the United States as the global hegemon and leader of the capitalist world (dealing with the potential threat from the Communist world). It now relies more and more on an international legal and regulatory architecture—fortified by various multilateral and bilateral agreements—to establish the power of capital over labor. This has involved a “grand bargain,” no less potent for being implicit, between different segments of capital. Capitalist firms in the developing world gained some market access (typically intermediated by multinational capital) and, in return, large capital in highly developed countries got much greater protection and monopoly power, through tighter enforcement of intellectual property rights and greater investment protections.

These measures dramatically increased the bargaining power of capital relative to labor, globally and in every country. In the high-income countries, this eliminated the “labor aristocracy” first theorised by the German Marxist theorist Karl Kautsky in the early 20th century. The concept of the labor aristocracy derived from the idea that the developed capitalist countries, or the “core” of global capitalism, could extract superprofits from impoverished workers in the less developed “periphery.” These surpluses could be used to reward workers in the core, relative to those in the periphery, and thereby achieve greater social and political stability in the core countries. This enabled northern capitalism to look like a win-win economic system for capital and labor (in the United States, labor relations between the late 1940s and the 1970s, for example, were widely termed a “capital-labor accord”). Today, the increased bargaining power of capital and the elimination of the labor aristocracy has delegitimated the capitalist system in the rich countries of the global North.

Increasing inequality, the decline in workers’ incomes, the decline or absence of social protections, the rise of material insecurity, and a growing alienation from government have come to characterise societies in both developed and developing worlds. These sources of grievance have found political expression in a series of unexpected electoral outcomes (including the “Brexit” vote in the UK and the election of Trump in the United States). The decline of the labor aristocracy—really, its near collapse—has massive implications, as it undermines the social contract that made global capitalism so successful in the previous era. It was the very foundation of political stability and social cohesion within advanced capitalist countries, which is now breaking down, and will continue to break down without a drastic restructuring of the social and economic order. The political response to this decline has been expressed primarily in the rise of right-wing, xenophobic, sectarian, and reactionary political tendencies.

21st Century Imperialism

The early 21st century has been a weird time for imperialism. On the one hand, the phase of “hyper-imperialism”—with the United States as the sole capitalist superpower, free to use almost the entire world as its happy hunting ground—is over. Instead, the United States looks significantly weaker both economically and politically, and there is less willingness on the part of other countries (including former and current allies, as well as those that may eventually become rival powers) to accept its writ unconditionally. On the other hand, the imperial overreach that was so evident in the Gulf Wars and sundry other interventions, in the Middle East and around the world, continues despite the decreasing returns from such interventions. This continued through the Obama presidency, and it is still an open question whether the Trump presidency will lead to a dramatic reduction of this overreach (“isolationism”) or merely a change in its direction.

The latter point is important, because there is little domestic political appetite in the United States for such imperial adventures, due to the high costs in terms of both government spending and the loss of lives of U.S. soldiers. The slogans that recently resonated with the U.S. electorate, such as that of “making America great again” were in that sense somewhat self-contradictory—looking towards an imagined past in which the American Dream could be fulfilled relatively easily (at least for some), without recognising that this was predicated upon the country’s global hegemony and far-flung empire. The global context of imperialism is a complex one, in which the contours shift constantly. Recent political changes in various countries of the North have meant that global strategic alliances are also much more fluid than at any time over the past half century. The most talked-about current examples are the changing attitude of the Trump administration towards the United States’ traditional enemy, Russia, and the complicated international politics emerging in Europe, with the Brexit vote and the emergence of right-wing political forces in a number of other European countries. But it is also evident in other parts of the world, notably in China, where traditional friends and foes are no longer so easily demarcated. Yet there is another sense in which the fundamentals of the imperialist process have not changed, even as the forms in which they are expressed are altered.

Defining imperialism broadly, as Lenin did—as the complex intermingling of economic and political interests, related to the efforts of large capital to control economic territory—it’s clear that imperialism has not really declined at all. Rather, it has changed in form over the past half century, especially when we embrace a more expansive notion of what constitutes “economic territory.” Economic territory includes the more obvious forms such as land and natural resources, as well as labor. These are all still hugely contested: The wars for oil in the Middle East, the continuing attempts at land grabs in Africa, and the struggle over the fruits of extraction of natural resources in parts of Latin America and Asia all testify to this.

But the struggle over economic territory also encompasses the search for and effort to control new markets—defined by both physical location and type of economic process. Understanding territory in this way helps us understand how imperialism is still very much alive and kicking, even though some of the more classic features (such as direct colonial control and annexations) are less in evidence.

One of the key aspects of recent capitalist dynamism has been its ability to create new forms of economic territory, bring them within the realm of capitalist economic relations, and therefore also subject them to imperialist control. Two forms of economic territory that are increasingly subject to capitalist organization and imperialist penetration today are 1) basic amenities and social services (earlier seen as the sole preserve of public provision) and 2) the generation and distribution of knowledge. A major feature of our times is the privatization of areas that, until recently, were generally accepted as public responsibilities. Basic amenities like electricity, water, and transportation infrastructure, and social services like health, sanitation, and education all fall into this category. Of course, the fact that these were seen as public duties does not mean that they were always fulfilled. Indeed, expanding public provision and access to high-quality public infrastructure and social services has only come about historically as the result of prolonged mass struggles. And issues of inequality in access have always existed. Nevertheless, the fact that provision is no longer necessarily in the public domain, and that private provision is increasingly seen as the norm, has opened up huge new markets for potentially profit-making activity. This has been a crucial way of maintaining demand, given the saturation of markets in many mature economies, and the inadequate growth of markets in poorer societies.

Opening up such markets has occurred through a combination of inadequate public provision and changes in economic policy to encourage private investment. The expansion of the global bottled water industry, for example, is partly a result of the failure of adequate public delivery of potable water. Meanwhile, global institutions—including formal organizations such as the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO), as well as more informal bodies such as the World Economic Forum—have actively encouraged private investment in formerly public sectors. This is a more complicated expression of the imperialistic drive for control over economic territory than the direct annexation of geographic territory, but that does not make it any less consequential.

Another new form of economic territory, increasingly subject to imperialist penetration, relates to knowledge generation and dissemination. The privatization of knowledge and its concentration in fewer and fewer hands—especially through the creation and enforcement of new “intellectual property rights”—have become significant barriers to technology transfer and social recognition of traditional knowledge. This is evident in the case of access to medicines, even essential and life-saving drugs. Patents reward multinational companies, allowing them to monopolize production, set high prices, or demand high royalties. Similarly, control over seed patents, overwhelmingly held by multinational agribusinesses, has enabled monopoly control over crucial technologies for food cultivation across the world, even in the poorest societies. The cases of medicine and food are comparatively well known and highly controversial, but much the same is true for industrial technologies, as well as knowledge for mitigating and adapting to adverse environmental changes (themselves resulting from the production systems created by global capitalism).

It’s not just that national and international institutional structures that should provide checks and balances to the privatization of knowledge are more fragile and less effective than they used to be. Rather, it’s that they are actively working in the opposite direction. The numerous “trade agreements” that have been signed across the world in recent years have been much less about trade liberalization—already so extensive that there is little scope for further opening up in most sectors—and much more about protecting investment and strengthening monopolies generated by intellectual property rights.

International Economic Agreements

The past two decades have witnessed an explosion in the treaties, agreements, and other mechanisms whereby global capital imposes it rules upon governments and their citizenries. Unlike the conditions imposed on developing countries by the IMF and the World Bank, these rules apply even to countries that are not debtor-supplicants to international financial institutions. They require all countries to restrict their policies, though these restrictions are especially damaging to the prospects of autonomous economic development in the “periphery” of the world capitalist economy.

The Multilateral Trading System

 

In terms of the multilateral trading system, the Uruguay Round of the General Agreement on Tariffs and Trade (signed off in 1994) moved to a single-tier system of rights and obligations, under which developing countries have to fully implement all rules and commitments. This was a quid pro quo for access to developed-country markets in agriculture, textiles, and clothing—sectors that had previously been highly protected. This has constrained the possibilities for autonomous development in the peripheral countries, reducing the policy choices open to them and denying them some of the most important instruments that had been used by countries of the current capitalist “core” in their own industrialization.

For example, the Agreement on Trade-Related Investment Measures (TRIMS) does not allow practices like local content specifications, designed to increase linkages between foreign investors and local manufacturers. The Agreement on Trade-Related Intellectual Property Rights (TRIPS) not only allows for the concentration and privatization of knowledge as noted above, but also restricts reverse engineering and other forms of imitative innovation that have historically been used for industrialization. It has forced the extension of patent rights in many countries, allowing the patenting of life forms. Under this new property regime, a large and powerful multinational company can, for example, sue a poor small farmer in a developing country for setting aside part of the harvest as seed for the coming year, on the grounds that this violates the company’s patent rights. The Agreement on Subsidies and Countervailing Measures (SCM) prohibits subsidies that depend upon the use of domestic over imported goods, or that are conditional on export performance. Ongoing negotiations in the World Trade Organisation on Non Agricultural Market Access (NAMA) are currently proceeding on the basis of much deeper tariff cuts in developing countries, which will further deprive them of a crucial policy instrument to support their infant industries.

The Agreement on Agriculture (1995) contained fine print that effectively allowed the developed countries to continue the massive subsidization and protection of their own agriculture sectors (and agri-business interests), but prevented developing countries from doing even a small fraction of this. Most developing countries are allowed only subsidies of 10% or less, while most developed countries only have to reduce certain agricultural subsidies, while maintaining and even increasing some others. Developing countries (like India) that attempt to provide some protection to farmers and to ensure food security are coming up against constraints imposed by the agreement. All subsidies, even in developing countries, are measured in relation to 1986-88 prices, not current prices, so even low subsidies run afoul of the 10% limit. Instead of recognising the ridiculous nature of this clause, the developed countries are resisting any change and have only agreed to provide a “Peace Clause”—applying only to certain countries and only for a limited period, preventing any case being brought to the dispute settlement panel of the WTO until the matter is finally resolved.

Regional and Bilateral Trade Agreements

However, if the WTO has constricted the “policy space” for developing countries, the many regional trade agreements of the past two decades have been even worse. There are nearly 400 such agreements in force, and they have become more comprehensive over the past twenty years. Most of these agreements, especially North-South agreements, tend to be “WTO-plus” (augmenting provisions already covered by the multilateral trading regime) or “WTO-extra” (containing provisions that go beyond current WTO rules). They often require reductions of actually applied tariffs, rather than of “bound” maximum tariff rates: Countries are forced to reduce tariffs from whatever level they happen to be at the moment, even if this is already below the upper limit. They demand more deregulation of trade in services. They require more stringent enforcement of intellectual property rights and reduce exemptions. For example, they allow compulsory licensing of medicines for generic (lower-cost) production only in emergencies. They also prohibit parallel imports (purchases of needed medicines from countries with cheaper production because they have used compulsory licensing). These agreements extend intellectual property rights to areas like life forms, extend exclusive rights to test data, and make intellectual property rights provisions more detailed and prescriptive. They forbid technology-transfer and knowledge-transfer requirements, as well as conditions on the nationality of senior personnel, as conditions for access to a country’s markets. They also enter into a range of areas that the WTO still leaves open to individual countries’ policy choices, such as antitrust policy, rules on investment and capital movement, government procurement, environmental standards, and even labor mobility. Further, unlike the WTO, most regional trade agreements do not provide exceptions to countries in cases of serious balance-of-payments problems or other external financial difficulties.

In addition, there are more than 4,000 bilateral investment treaties (BITs) in force in the world. These are all about protecting and promoting private investment of all types, and effectively privileging the rights of investors over the rights of citizens in the host country. There is typically a very broad, asset-based definition of investment that includes foreign direct investment (FDI), some types of investment in stocks, purchases of real estate, and even intellectual property rights. There is also a very strong and expansive view on what constitutes “expropriation” of assets for which investors can demand compensation. It is not only outright nationalization of assets that can be interpreted as expropriation, but also all sorts of government regulation (even for environmental or labor protection) as well as taxes. So for example, in Mexico, companies that have polluted municipal water supplies—and therefore been ordered to stop production until they can prevent such pollution—have successfully claimed damages for the associated losses. Other companies have won cases under BITs when governments have imposed higher taxes on their profits.

Both bilateral and, increasingly, regional agreements are subject to dispute settlement mechanisms, both between states and between an investor and a state, that are highly arbitrary, opaque to public scrutiny, and generally pro-investor in their judgments. Since they are legally based on “equal” treatment of legal persons with no primacy for human rights, they have become known for their pro-investor bias. This is partly due to the incentive structure for arbitrators, since there is a lucrative “revolving door” for legal experts between serving as arbitrators and as legal advisors for corporations. And it is partly because the system is designed to provide additional guarantees to investors, rather than making them respect host countries’ laws and regulations.

Similarly, the rules governing international finance and debt work in ways that reinforce the unequal global power relations between large capital and people across the world. Nowhere is this more evident than in the legal structures governing sovereign (national government) debt. The lack of any coherent system to deal with debt default and to enable the restructuring of sovereign debt has led to situations in which countries and their populations are bled dry over years and even decades. “Austerity” measures that reduce public spending on social essentials are forced upon unwilling societies. Developing countries have known this for some time, but some developed countries (such as crisis-ridden economies of the European periphery, like Greece and Spain) are now experiencing the same.

Countries that somehow manage to restructure debt or that unilaterally decide to renege on some patently unfair debt taken on in the past are punished. Under the systems governing international debt, entire national populations lack even the minimum conditions of debt workout that are routinely accorded to individual and corporate debtors within national legal systems. Here, too, legal proceedings tend to be biased towards investors and show little recognition of the minimum rights of the citizenry in affected countries. (Take, for example, the travails that the government of Argentina currently faces in U.S. courts, in lawsuits brought by financial “vulture funds.”) This is another way in which contemporary imperialism is expressed.

Structures of Global Production and Trade

It is often argued that the rise of new powers—especially China, but also India, Brazil and others—means that the concept of “imperialism” is no longer valid. Yet the imperialist phase of capitalism has always been characterised by the emergence of “new kids on the block,” some of which have gone on to become neighborhood bullies. At the time when Lenin wrote his famous pamphlet Imperialism: The Highest Stage of Capitalism, a century ago, the emergence of the United States as the dominant global power was far from evident. Lenin’s claim that, during the imperialist phase of capitalism, “the territorial division of the whole world among the biggest capitalist powers is completed” is the weakest link in his argument, and one which was belied almost immediately. The United States, which was then only a minor player compared to the major European powers, emerged to dominate the world scene from the second half of the 20th century on. The rise of Japan in the second half of the 20th century by no means signified a weakening of imperialist power generally; it merely necessitated a more complicated assessment of such power.

The recent emergence of China is being interpreted as a sign that the global economic landscape is completely transformed. It is true that the growing weight of China in world trade and investment has had major effects: China has become the biggest source of manufactured-goods imports for most countries, changed the terms of trade and volume of exports for many primary-product (agricultural and mineral raw materials) producing countries, and brought more countries into manufacturing value chains. It is true, also, that Chinese capital has become a significant player in the ongoing struggle for control over economic territory across the world.

Yet there are dangers of exaggerating its current significance. Even now, China accounts for less than 9% of global output (constant 2005 U.S. dollars, nominal exchange rates); its per capita GDP is less than half (around 45%) of the global average, and still just fraction of the average for the economies of the imperialist core. In relative terms, China remains a “poor” country. Many of the hyperbolic mainstream analyses and predictions with respect to China are eerily similar to the predictions for Japan in the 1970s, as an emerging giant soon to take over the role of global economic leadership from the United States.

A similar point can be made even more forcefully for other nations that have been ecstatically described as “emerging economies,” supposedly proving that forces of imperialism are no hindrance to the rise of developing countries. Taken together, however, the “BRICS” nations (Brazil, Russia, India, China, and South Africa) account for less than 15% of world GDP, even though their share of global population is just under 50%. Announcing these countries as new global powers is very premature, especially when global institutional structures are still very much tilted in favor of the established powers.

All this does not mean that there have been no changes in global economic and political power: there have been and will continue to be significant and even transformative changes. However, these changes in the relative positions of different countries on the economic and geopolitical ladder do not mean that the basic imperialistic tendencies that drive the global system have disappeared—indeed, they may even become more intense as the struggle for economic territory becomes more acute.

This is particularly evident in the global spread of multinational corporations and their new methods of functioning, particularly with the geographic disintegration of production. Technological changes—advances in shipping and container technology that dramatically reduced transport times and costs, as well as the information technology revolution that enabled the breakdown of production into specific tasks that could be geographically separated—have been critical to this process. Together, they made possible the emergence of global value chains, which are typically dominated by large multinational corporations, but involve networks of both competing and cooperating firms. The giant corporations are not necessarily in direct control of all operations. Indeed, the ability to transfer direct control over production—as well as the associated risks—to lower ends of the value chain is an important element in increasing their profitability. This adds a greater intensity to the exploitation that can be unleashed by such global firms, because they are less dependent upon workers and resources in any one location, can use competition between suppliers to push down their prices and conditions of production, and are less burdened by national regulations that might reduce their market power.

This transformation has therefore given rise to what has been called the “Smiling Curve” of exchange values and profits. Value added and profits are concentrated in the pre-production (such as product design) and post-production (marketing and branding) phases of a value chain. These now provide immense economic rents to the global corporations that dominate them, due to the intellectual property monopolies these corporations enjoy. The case of Apple phones is now well known: the actual producers in China (both companies and workers) earn only about one-tenth of the final price of the good; the rest is taken by Apple for product design, marketing, and distribution. The producers of coffee beans across the developing world earn a tiny percentage of the price of coffee, in contrast to the high profits of a multinational chain like Starbucks. Small farmers and laborers growing cocoa beans earn next to nothing, compared to the leading sellers of chocolate, all of which are Northern companies. The economic rents associated with the pre- and post-production phases have been growing in recent years. Meanwhile, the production phase, from which workers and small producers mainly derive their incomes, is exposed to cutthroat competition between different production sites across the world, thanks to trade and investment liberalization. Therefore, incomes generated in this stage of the value chain are kept low.

The overall result is twofold. First, this has resulted in an increase in the supply of the “global” labor force (workers and small producers who are directly engaged in production of goods and services). Second, the power of corporations to capture rents—from control of knowledge, from oligopolistic/monopolistic market structures, or from the power of finance capital over state policy—has greatly increased. Overall, this has meant a dramatic increase in the bargaining power of capital relative to labor, which in turn has resulted in declining wage shares (as a percentage of national income) in both developed and developing countries.

Implications for Workers

These processes imply worsening material conditions, for most workers, in both the periphery and the core. Imperialism has generally weakened the capacity for autonomous development in the global South, and worsened economic conditions for workers and small producers there, so that is not altogether surprising. The growth of employment and wages in China is as a break from that pattern and an example of some benefits of global integration, at least for a subset of working people in the developing world. The beneficiaries, however, remain a minority of the workers in the global South. In other countries generally seen as “success stories” of globalization, like India, the economic realities for most people are much bleaker.

The more obvious—and potent—change that has resulted from this phase of global imperialism has been the decline of the labor aristocracy in the North. The opening of trade, and with it a global supply of labor, meant that imperialist-country capital was no longer as interested in maintaining a social contract with workers in the “home” country. Instead, it could use its greater bargaining power to push for ever-greater shares of national income everywhere it operated. This was further intensified by the greater power of mobile finance capital, which was also able to increase its share of income as well. In the advanced economies at the core of global capitalism, this process (which began in the United States in the 1990s) was greatly intensified during the global boom of the 2000s, when median workers’ wages stagnated and even declined in the global North, even as per capita incomes soared. The increase in incomes, therefore, was captured by stockholders, corporate executives, financial rentiers, etc.

The political fallout of this has now become glaringly evident. Increasing inequality, stagnant real incomes of working people, and the increasing material fragility of daily life have all contributed to a deep dissatisfaction among ordinary people in the rich countries. While even the poor among them are still far better off than the vast majority of people in the developing world, their own perceptions are quite different, and they increasingly see themselves as the victims of globalization. Decades of neoliberal economic policies have hollowed out communities in depressed areas and eliminated any attractive employment opportunities for youth. Ironically, in the United States this favored the political rise of Donald Trump, who is himself emblematic of the plutocracy.

Similar tendencies are also clearly evident in Europe. Rising anti-EU sentiment has been wrongly attributed only to policies allowing in more migrants. The hostile response to immigration is part of a broader dissatisfaction related to the design and operation of the EU. For years now, it has been clear that the EU has failed as an economic project. This stems from the very design of the economic integration—flawed, for example, in the enforcement of monetary integration without banking union or a fiscal federation that would have helped deal with imbalances between EU countries—as well as from the particular neoliberal economic policies that it has forced its members to pursue.

This has been especially evident in the adoption of austerity policies across the member countries, remarkably even among those that do not have large current-account or fiscal deficits. As a result, growth in the EU has been sclerotic at best since 2004, and even the so-called “recovery” after 2012 has been barely noticeable. Even this lacklustre performance has been highly differentiated, with Germany emerging as the clear winner from the formation of the Eurozone. Even large economies like France, Italy, and Spain experienced deteriorating per capita incomes relative to Germany from 2009 onwards. This, combined with fears of German domination, probably added to the resentment of the EU that is now being expressed in both right-wing and left-wing movements across Europe. The union’s misguided emphasis on neoliberal policies and fiscal austerity packages has also contributed to the persistence of high rates of unemployment, which are higher than they were more than a decade ago. The “new normal” therefore shows little improvement from the period just after the Great Recession—the capitalist world economy may no longer be teetering on the edge of a cliff, but that is because it has instead sunk into a mire.

It is sad but not entirely surprising that the globalization of the workforce has not created a greater sense of international solidarity, but rather undermined it. Quite obviously, progressive solutions cannot be found within the existing dominant economic paradigm. But reversions to past ideals of socialism may not be all that effective either. Rather, this new situation requires new and more relevant economic models of socialism to be developed, if they are to capture the popular imagination. Such models must transcend the traditional socialist paradigm’s emphasis on centralized government control over an undifferentiated mass of workers. They must incorporate more explicit emphasis on the rights and concerns of women, ethnic minorities, tribal communities, and other marginalised groups, as well as recognition of ecological constraints and the social necessity to respect nature. The fundamental premises of the socialist project, however, remain as valid as ever: The unequal, exploitative and oppressive nature of capitalism; the capacity of human beings to change society and thereby alter their own futures; and the necessity of collective organisation to do so.

Falling Incomes.

In 25 advanced economies, 65-70% of households (540-580 million people) “were in segments of the income distribution whose real incomes were flat or had fallen” between 2005 and 2014. By contrast, between 1993 and 2005, “less than 2 percent, or fewer than ten million people, experienced this phenomenon.”

In Italy, a whopping 97% of the population had stagnant or declining market incomes between 2005 and 2014. The equivalent figures were 81% for the United States and 70% for the United Kingdom.

The worst affected were “young people with low educational attainment and women, single mothers in particular.” Today’s younger generation in the advanced countries is “literally at risk of ending up poorer than their parents,” and in any case already faces much more insecure working conditions.

Shifting Income Shares

The McKinsey report noted that “from 1970 to 2014, with the exception of a spike during the 1973–74 oil crisis, the average wage share fell by 5 percentage points in the six countries studied in depth” (United States, United Kingdom, France, Italy, the Netherlands and Sweden); in the “most extreme case, the United Kingdom, by 13 percentage points.”

These declines occurred “despite rising productivity, suggesting a disconnect between productivity and incomes.” Productivity gains were either grabbed by employers or passed on in the form of lower prices to maintain competitiveness.

Declining wage shares are widely seen as results of globalization and technological changes, but state policies and institutional relations in the labor market matter. According to the McKinsey report. “Swedish labor policies such as contracts that protect both wage rates and hours worked” resulted in ordinary workers receiving a larger share of income.

Countries that have encouraged the growth of part-time and temporary contracts experienced bigger declines in wage shares. According to European Union data, more than 40% of EU workers between 15 and 25 years have insecure and low-paying contracts. The proportion is more than half for the 18 countries in the Eurozone, 58% in France, and 65% in Spain.

The other side of the coin is the rising profit shares in many of these rich countries. In the United States, for example, “after-tax profits of U.S. firms measured as a share of the national income even exceeded the 10.1 percent level last reached in 1929.”

Policy Matters

Government tax and transfer policies can change the final disposable income of households. Across the 25 countries studied in the McKinsey report, only 20-25% of the population experienced flat or falling disposable incomes. In the United States, government taxes and transfers turned a “decline in market incomes for 81 percent of all income segments ... into an increase in disposable income for nearly all households.”

Government policies to intervene in labor markets also make a difference. In Sweden, the government “intervened to preserve jobs, market incomes fell or were flat for only 20 percent, while disposable income advanced for almost everyone.”

In most of the countries examined in the study, government policies were not sufficient to prevent stagnant or declining incomes for a significant proportion of the population.

Effects on Attitudes

The deteriorating material reality is reflected in popular perceptions. A 2015 survey of British, French, and U.S. citizens confirmed this, as approximately 40% “felt that their economic positions had deteriorated.”

The people who felt worse-off, and those who did not expect the situation to improve for the next generation, “expressed negative opinions about trade and immigration.”

More than half of this group agreed with the statement, “The influx of foreign goods and services is leading to domestic job losses.” They were twice as likely as other respondents to agree with the statement, “Legal immigrants are ruining the culture and cohesiveness in our society.”

The survey also found that “those who were not advancing and not hopeful about the future” were, in France, more likely to support political parties such as the far-right Front National and, in Britain, to support Brexit.

Note: The report is based on a study of income distribution data from 25 developed countries; a detailed dataset with more information on 350,000 people from France, Italy and the United States and the UK; and a survey of 6,000 people from France, the United Kingdom and the United States that also checked for perceptions about the evolution of their incomes.

The newly emerging economies are often thought to be more significant than they are, in part, because many analyses compare incomes across different countries based not on nominal exchange rates, but rather on purchasing power parity (PPP) exchange rates. PPP exchange rates seek to establish the relative purchasing power of each currency in terms of prices of a common basket of commodities.

The results, however, can be quite dubious, as they are based on the price of a basket of representative consumption goods in the United States, which may not be so relevant to consumption elsewhere—especially not the poor in the developing world. The basket of goods is unchanging over time, even though consumption patterns tend to shift with technological change and evolving preferences. PPP exchange rates are also notoriously imperfect because of the infrequency and unsystematic nature of the price surveys that are used to derive them.

In general, the countries where the PPP exchange rate is much higher than the nominal exchange rate are low-income countries with low average wages. It is precisely because a significant section of the workforce receives very low compensation that goods and services are available more cheaply than in countries where the majority of workers receives higher wages. Using PPP-modified GDP data may miss the point, by treating the poverty of the majority of wage earners in an economy as an economic advantage.



Source:Ocnus.net 2017

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