Central Banks (finally) Recognize Inequality as a Problem and Wages are the Issue

by Terrance Hunsley

The CBC carried a story last week on the comments of Jerome Powell, Chair of the US Federal Reserve.

…he made it clear that the central bank’s research shows that a spreading gulf in relative wealth was not just a social concern but something that was bad for the entire economy.

…Powell expressed strong concern for the growing gap between rich and poor that has been accentuated by the economic crisis due to COVID-19.

They also cited the Bank of Canada’s Governor, Tiff Macklem, as having expressed the same concern. These acknowledgements by the stewards of our financial health, are important and useful. No one can dismiss them as activist propaganda.

Coincidentally the Institute for New Economic Thought announced last week a new publication, Macroeconomic Inequality from Reagan to Trump (available at https://www.ineteconomics.org/research-books). The research concludes that a major cause of increasing inequality during that period was systematic suppression of wages and the creation of low wage jobs.

So how did this happen?

The central banks could acknowledge that for more than two decades, they espoused monetary theory that posited a measure called the NAIRU – meaning non-accelerating of inflation rate of unemployment. The concept is attributed to Milton Friedman and in layman’s terms means that if unemployment gets below a certain level, workers will be able to demand higher wages and thereby push inflation upward.  So the central bank would avoid stimulating demand until a “better balance” was reached. Reagonomics (trickle down) and supply side economics resulted, and fuelled the inequality.

Canada’s Centre for the Study of Living Standards (CSLS) published research several years ago showing in a similar vein that …the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005, while over the same period, total economy labour productivity gains were 37.4 per cent.(http://www.csls.ca/notes/note2009-2.pdf). Basically, the bottom half of the income scale lost purchasing power. The top half enjoyed some increases, but mainly those in the top twenty five percent.

Some analysts have pointed to a small uptick in overall wages which was taking place just before COVID, mainly as a result of the exodus of the baby boom from the labour force. But that change is minimal relative to the overall loss of earning power and status of the bottom half of the labour force.

Canada and the USA were leaders in free trade and the encouragement of globalization during that period, and the ILO concluded several years ago that globalization and the technological revolution were factors in the increasing income inequality. But the ILO pointed out that domestic policies were also at fault. Here again the US, with Canada not far behind, led the world in eliminating basic protections for workers, by “liberalizing” labour markets. Employers were able to defeat unions by franchising and by moving jobs to low wage countries. They were permitted to chop jobs up into part-time precarious low-wage jobs with no benefits like health care, pension contributions, sick leave, etc. Minimum wage levels were often allowed to fall behind inflation and lose value. And in the early nineties in both countries, social assistance was chopped almost in half to ensure that employable people would not refuse the sub-subsistence wages being offered.

So if we find, as we do in both countries, that many people have little or no trust in government, we can trace some of the cause to domestic policies which victimized workers in favour of serving rich CEO’s. A report (Future of Work Policies for the 2020’s) that I wrote recently for the Pearson Centre presented an extensive set of recommendations to improve low working incomes and increase the power of workers over their own working life. It can be found here: https://socialcanada.org/2020/09/20/future-of-work-policies-for-the-2020s-reposted/

 

 

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