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June 2011, Week 4

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Tue, 28 Jun 2011 22:37:35 -0400
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Spectre of stagnating incomes stalks globe
By Chris Giles
Financial Times
June 27, 2011
http://www.ft.com/intl/cms/s/0/0e0f51e0-a0e2-11e0-adae-00144feabdc0.html

Nearly three years after the start of the economic
crisis, a new spectre is haunting the world's most
advanced economies: the prospect that the majority of
their citizens will face years of stagnant wages.

In the postwar years, there was a belief in developed
economies that each generation could expect to have
materially better living standards than their parents.
Yet the outlook for income growth has rarely looked
worse than it does today.

For some middle-income groups, the idea of stationary
or declining incomes is not new. Fork-lift truck
drivers in Britain could expect to earn #19,068 in
2010, about 5 per cent lower than in 1978, after
adjusting for inflation. Median male real US earnings
have not risen since 1975. Average real Japanese
household incomes after taxation fell in the decade to
mid-2000s. And those in Germany have been falling in
the past 10 years.

Some of this pressure on the middle income households
was masked - at least temporarily - by the credit boom,
which allowed families to spend more than they earned.
Now, three years after the end of the cheap money era -
and with developed countries struggling to get their
economies growing again - middle classes around the
globe are feeling the squeeze.

It is hardly the backdrop politicians would want as
they are being forced to contemplate raising taxes and
cutting public spending to repair public finances. And
that consolidation is required before countries begin
the even more difficult process of adjusting for rising
longevity and ageing populations.

Two questions are raised by the trends in household
wages and incomes. What exactly is happening to incomes
across advanced economies? And why?

Only recently have the answers begun to be clear.
Starting in 1975, male US median pay has stagnated in
real terms, while gross domestic product continued to
rise rapidly. At first, other countries resisted this
trend, leading to concerns in the US that a peculiarly
American disease was afflicting its culture and labour
market.

Growth in per capita national income must go somewhere.
In the US, the money flowed almost exclusively to the
very richest. The earnings of US individuals with
pre-tax income in the top 1 per cent accounted for 8
per cent of total in 1974, but rocketed to 18 per cent
by 2008, according to the world top incomes database, a
resource compiled from tax return data. Even larger
proportionate rises in the share of income went to the
top 1 per cent of those with incomes within the 1 top
per cent.

But rising inequality in recent years is far from a US
phenomenon. The Organisation for Economic Co-operation
and Development found increasing income inequality
between the mid 1980s and late 2000s in 17 out of 22
advanced economies for which it had sufficient data.
"There are signs that levels [of inequality] may be
converging at a common and higher average," the OECD
said in a recent report and "countries such as Denmark,
Germany and Sweden, which have traditionally had low
inequality, are no longer spared from the rising
inequality trend".

Rising inequality in almost all countries is being
driven by trends in the labour market. Although most
OECD governments have tried to fight the rise in wage
inequality by increasing in-work state benefits and
trimming payroll taxes for those on lower incomes, the
growth in wage inequality has exceeded the willingness
to impose ever more progressive tax and benefit
systems.

Exacerbating the rising income inequality has been a
squeeze in the need for jobs demanding mid-range
skills. Across advanced economies, the labour market is
becoming polarised into "lovely jobs and lousy jobs",
says Alan Manning, a professor at the Centre for
Economic Performance at the London School of Economics.
Between 1993 and 2006, the proportion of jobs with
middling pay fell, while high- and low-paid employment
rose. This finding was common across almost all
advanced economies, regardless of their economic
characteristics and political culture.

(For the entire article, go to
http://www.ft.com/intl/cms/s/0/0e0f51e0-a0e2-11e0-adae-00144feabdc0.html)

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