Friday, December 7, 2012

Wages in developed world slump for second time since start of banking crisis

The Guardian reports that wages in the developed world have slumped for the second time since the beginning of the financial crisis.

By definition, a slump in wages feeds back negatively into the real economy.  Consumers represent approximately 70% of demand so lower wages result in shrinking demand.

What is interesting about the report is that the lower wages are occurring at the same time as companies are reporting near record profits.  This indicates that more of the revenue is going towards shareholders.

By definition, pushing more of the revenue towards the shareholders is not sustainable in the long run as a company needs someone to buy its products.  The lack of sustainability is a direct result of the negative feedback loop from lower wages.

Henry Ford had a number of innovations, but perhaps his greatest innovation was recognizing that his workers needed to be paid enough so they could afford his company's product.

This report on wages suggests that owners of businesses and their managers are forgetting this simple lesson.

Wages in the developed world have fallen in real terms for the second time since the banking crisis, continuing the long-term trend of workers being made to cope on a smaller share of national income. 
Steep falls in pay packets in eastern Europe and a wage freeze across the richest western countries, including the UK, sent monthly salaries into reverse in 2011 after taking inflation into account, said the International Labour Organisation. 
The fall is likely to intensify the debate over the contribution made by employers to the communities where they operate....
The ILO director-general, Guy Ryder, said: "This report clearly shows that in many countries, the crisis has had a strong impact on wages – and, by extension, workers." 
The report found wages have also failed to keep pace with growing productivity. "This trend has resulted in workers benefiting less from the fruits of their work while the owners of capital are benefiting more," it said. Ryder added: "Workers and their families are not receiving the fair share they deserve." 
The report highlights recent findings that show wages have grown at a slower pace than labour productivity – the value of goods and services produced per person employed – over the past decades in a majority of countries for which data is available. In developed economies, labour productivity has increased more than twice as much as wages since 1999.... 
He said the trend over the past 30 years, especially in the west, was for companies and their owners to accrue most of the benefits of economic growth. 
In 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this dropped to 65% in the years just before the economic crisis. It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course.

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