An article by Johnny Munkhammar of the Swedish think tank Timbro
As the EU Finance Ministers met on the 27th of February, they expressed worries about profits rising faster than wages in Europe. The conclusion was that the current global economic boom mostly benefits owners rather than workers. This led the German Finance Minister to warn of an upcoming crisis of legitimacy for the current economic and social model. The Ministers jointly stressed that wages should grow in line with productivity.
This resurrects an old ghost. Will Karl Marx, the man who has so far been wrong about most everything, finally have a point about usurpation, in today’s global economy? And will politicians attempt to meet this alleged development with the same measures as they have done in the past? Will they increase taxes – on profits, for example – to make government grow and redistribute money to wage earners? Or might there be another way?
First of all, what is actually happening? According to the EU Commission, real wage costs in EU-15 – the European Union before the latest enlargement, for which there is comparable historical data – is expected to rise by 0,8 per cent annually 2000-2008. This might seem to be a low level. But the average annual increase in EU-15 between 1991 and 2000 was a mere 1,1 per cent and 1981-1990, it was 0,8 per cent.
Thus, real wage costs are rising roughly at the same pace as they have been for several decades. But people’s disposable incomes might not be notably increasing. As the OECD concluded in their “Taxing Wages”, the average tax wedge is 42,6 per cent in EU-15. Almost half the wage cost is taxes. Thus, politicians who worry that people’s disposable incomes are not rising have the power to change that. But how are, then, the shares of profits and wages respectively developing in the economy?
In 2008, the wage share of the economy in EU-15 is predicted to be 66,7 per cent, down from 67,7 per cent in 2000. In 1990, the wage share was 69,7 per cent and in 1981, it was 75,3 per cent. The share of wages in the European economy is thus decreasing slowly. For many developing countries with a high economic growth rate, the trend is the opposite. Foreign investments in labour-intensive production drive up the wage share in those countries. What are the implications of the decreasing wage share in the European economy?
Mainly, it shows that Europe has moved towards a more advanced, capital-intensive production. By any measure of prosperity, that is very good. But it also implies that many owners of companies are very successful in today’s global economy. As companies find new places to produce goods and services cheaper, profits rise – faster than wages. That creates a political dynamic towards redistribution of resources through more government. Why should the rich get richer fast, but ordinary working people merely get crumbs from the table?
The image is not really true. We all benefit from this development as consumers, since prices of many goods fall. Lower prices are just as important as higher wages, especially for people with low incomes. Furthermore, we are all substantial owners indirectly, since pension funds get a large share of the profits. But accepting that politicians should act, more government intervention would be counterproductive. Higher taxes in general would slow down growth and employment. And higher taxes on capital would decrease investments in Europe.
European governments should do the opposite. They can always make it more beneficial to work, by decreasing labour taxes. Profits are, however, likely to continue rising faster than wage costs. But ownership is not static. There are many ways for politicians to make it easier for more people to become owners and take part in the rapidly rising profits:
- Decrease taxes on capital and investments.
- Give the state-owned companies to the citizens.
- Take away obstacles for entrepreneurship.
- Simplify home ownership.
- Let people keep more of their income.
- Give people the right to invest at least part of their pension funds.
Substantially more people would get opportunities to become owners as a result of reforms like these. There would be money to invest and it would be more beneficial to do so. In more of an ownership society, most people would have incomes from both wages and profits. And in time, there would be more opportunities to create private wealth and thereby economic security for ordinary people.