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If wages are to rise, workers need more bargaining power

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“IT’S just not going to happen,” said Troy Taylor, the boss of a Coca Cola bottling company, when asked at a recent Federal Reserve event whether he foresaw broad-based wage gains. His remarks (unlike the fizzy drinks he sells) were unsweetened. But experience suggests he may have a point. In most rich countries, real pay has grown by at most 1% per year, on average, since 2000. For low-wage workers the stagnation has been more severe and prolonged: between 1979 and 2016, pay adjusted for inflation for the bottom fifth of American earners barely rose at all. Politicians are scrambling for scapegoats and solutions. But addressing stagnant wages requires a better understanding of the relationship between pay, productivity and power.

In the simplest economic models, productivity is almost all that matters. Workers are paid exactly and precisely in accordance with their contribution to a firm’s output. Were they paid less, rival employers could profit by luring them away with higher pay, and wages would be bid up until they came into line with productivity. Firms paying more than workers contribute would be losing out for no reason.

This sort of view suggests a few ways to improve workers’ lot. Governments could pursue policies that would help workers move from low-productivity jobs to high-productivity ones, for instance. That might mean investing in education and training, or removing obstacles to relocation or moving from one employer to another, such as high housing costs in places with productive companies, or laws that enforce non-compete clauses in job contracts. When productivity-boosting strategies are not enough to do the trick, a government’s best option is to top up low pay as efficiently as possible. Economists favour wage subsidies, such as Milton Friedman’s proposed negative income tax, which influenced the design of America’s earned-income tax credit. Such subsidies encourage people to stay in work in order to qualify, and do not make workers more expensive and thus discourage hiring. They are also simple to administer.

But it has long been clear that wage-setting is more complicated than the simplest models allow. Growth in pay is linked to growth in productivity, as Anna Stansbury and Lawrence Summers noted in a paper last year. But other influences seem to depress wages. Thus labour productivity rose by 75% in America from 1973 to 2016, while average pay rose by less than 50% and median pay by just over 10%. A direct link between pay and productivity would imply that raising the minimum wage would automatically cut employment, as those workers who had been paid according to their contributions suddenly became overpaid (and, shortly thereafter, unemployed). But no such clear, negative relationship shows up in the data.

The reason, economists reckon, is power. New hires generate a surplus, reflecting the fact that both worker and firm expect to gain from the transaction. Wage bargaining is a negotiation over how to split this surplus. If firms have the upper hand, because a new job is harder to find than a new worker, employers capture most of the surplus, creating a gap between the value created by workers and what they are paid. A rise in the minimum wage could then boost pay without reducing employment by redistributing some of this surplus, leaving a firm with a smaller gain than before, but a gain nonetheless.

There is good reason to think that power imbalances play a big part in the rich world’s wage stagnation. Product markets have become more concentrated, meaning that fewer firms account for a larger share of output. That increases companies’ power in labour markets, since workers are less able to find alternative employment or to pit rival employers against each other in a bidding war. In a recent paper Suresh Naidu, Eric Posner and Glen Weyl estimate that this rise in firms’ power may reduce labour’s share of national income by as much as a fifth. They argue that one way to help struggling workers might be to use antitrust policies to make product markets less concentrated and more competitive.

A complementary approach would be to increase workers’ power. Historically, this has been most effectively done by bringing more workers into unions. Across advanced economies, wage inequality tends to rise as the share of workers who are members of unions declines. A new paper examining detailed, historical data from America makes the point especially well. Henry Farber, Daniel Herbst, Ilyana Kuziemko and Mr Naidu find that the premium earned by union members in America has held remarkably constant during the post-war period. But in the 1950s and 1960s the expansion of unions brought in less-skilled workers, squeezing the wage distribution and shrinking inequality. Unions are not the only way to boost worker power. More radical ideas like a universal basic income—a welfare payment made to everyone regardless of work status—or a jobs guarantee, which extends the right to a government job paying a decent wage to everyone, would shift power to workers and force firms to work harder to retain employees.

Strong bad

Economists are unlikely to cheer such proposals. A broad jobs guarantee would transform society in unpredictable and costly ways. And unions look like monopoly sellers of labour—cartels, intended to leech rents from society as a whole. But the powerful unions of the post-war decades did not stop productivity growing much faster than advanced economies have since managed. And it was during that period that growth in real pay most closely tracked growth in labour productivity, as the simplest economic models reckon it should. More empowered workers would no doubt unnerve bosses. But a world in which pay rises are unimaginable is far scarier.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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