Ten years after the crisis, a “non-decent” recovery
Opening remarks at the NFS conference on decent work, Riga, 2 October 2018
A recovery without wage growth, without job quality, without corporate investment
Ten years after the crisis, it is a weak and fragile economic recovery that we have. Since this is a conference for the World Day of Decent Work, we might agree that there is not much “decent”, or socially acceptable, in that recovery. Employment levels have, at last, recovered pre-crisis levels. But that has come at the cost of job quality and earnings. The decrease in the unemployed has for most of it been fuelled by low paid, low productivity jobs. According to the OECD Compendium of productivity indicator, three out four jobs created in Europe are in jobs below national average labour productivity; four out of five in the US. Meanwhile wage growth lags behind. As the just released Interim Economic Outlook points out, wage growth is “surprisingly low”. The recovery is entirely dependent on fiscal policy.
With the current interest rate levels and low cost of capital, business investment should be booming. It is not. OECD average business investment spending in 2018–19 is projected to be around 15% below the level required to maintain annual pace as over 1990–2007. Businesses are hoarding record returns. Instead of making productive investments, these corporations pay them out in shareholder dividends and share-buybacks, or channelling them into mergers and acquisitions.
A shrinking middle class
The recovery is all but a decent one in the context of decade long trends in rising inequalities. The OECD has delivered a number of very useful reports since Growing Unequal in 2008. The more recent one of the series is on social mobility. As highlighted by the TUAC, the conclusions are striking. Since the 1990s, it has become less likely for people at the bottom to move up and more likely for people at the top to remain there. When upward mobility takes place for the bottom 20%, it is due to what he OECD calls “unpredictable income change”, not due to sustained careers. In another upcoming report, the preliminary OECD findings are equally worrying about the state of the middle class. Across the OECD, it is shrinking and is getting older, giving fewer chances for working families. Another OECD report exposes the regional dimension of inequality. Jobs and well-being are increasingly concentrated in a few regions and urban “hubs”, those that are most connected and competitive enough to face globalisation. Across the OECD, capital regions created 18.1% of all jobs during 2011–2016 even though they make up roughly 1% of the total number of regions. One could argue that the picture is different in emerging economies. Yet, four out of five people in the world live with less than US$ 10 per day while, in OECD countries, nearly 70 percent live with more than US$ 20 per day. The income gap between emerging-developing economies and OECD countries is still considerable and has not narrowed down.
Decoupling between wage and productivity
At the heart of the rise of inequalities within OECD economies lies the combination of a generalised slowdown of labour productivity, the fall in the share of labour in GDP and with that, the widening gap between wages and productivity. Average labour productivity growth has been decreasing in the past decade and now fluctuates at around 1%, in spite of the promise offered by digitalisation and automation. For its part, the decline in labour income shares and the decoupling between growth in labour productivity growth and real labour compensation (i.e. adjusted for inflation) are observed in a clear majority of OECD countries, to mention a few: the US, Germany, Netherlands, Japan, Australia since the early 2000s, and the UK since 2008.
More entrenched, less inclusive redistribution
For some, such outcomes can be socially acceptable if, ex-post, the welfare state and income redistribution “compensate the losers”, through taxes and transfers. Past reforms have made welfare and tax systems less redistributive. Social safety nets and active labour market policies have become less accessible. And where the tax-transfer mix has indeed remained as redistributive as before, it is the changing reality of the labour market and of society — including the rise of job precarity and social exclusion — that are making them less effective in reducing market inequalities. According to upcoming OECD research, the redistribution has becoming more entrenched since 2001. Redistribution has strengthened in several countries, but it did so between working families and it weakened between working families and those without employment. If you are excluded from the labour market and decent work, there is less chance that you can benefit from collective solidarity.
“Deleveraging” never happened
Despite the post-2008 wave of financial reforms and the G20 promise of a smaller, manageable financial sector, “de-leveraging” of our economies did not materialise. Financial vulnerabilities remain as does the old unsustainable model of debt financed consumption and investment. Debt levels relative to global GDP remain stable since the onset of the crisis in 2008. Household indebtedness increased from 85% in 1995, to 140% in 2010 and has remained stable since. Non-financial corporate debt rose from 110% of GDP in 1995 to 140% in 2008 and has remained stable at that level since. Compared to 2008, the only noticeable change is with the location of debt and risks, which have shifted from banks’ balance sheet to the bond markets and to the lightly regulated shadow banking system. The risks are particularly acute in China. The latest edition of the OECD Business & Finance Outlook reports that Chinese banks’ liabilities have grown from 200% of GDP in 2008 to 400% in 2017, of which a quarter is … off balance sheet.
The disruptive nature of digitalisation
While we still have to deal with the legacies of the past, an industrial revolution is starting. OECD projections suggest that 14% of existing jobs would be completely automated in the next 15–20 years. Another 40% would see their task content partially changed. The impact of digitalisation will also exacerbate regional differences according to a recent OECD report: “Regions that will be better off have a larger share of workers with tertiary education, a larger proportion of jobs in services, and are highly urbanised”. The share of jobs at risk of automation is highest in the West Slovakia region (39%) and lowest in the Oslo and Akershus region (4%) in Norway.
But as we know, the distinctive feature of this technological revolution is that it gives employers even greater possibilities to monitor workers at arm’s length and to outsource, as seen in the rise of non-standard forms of work in the platform economy. While overall the proportion of workers who are self-employed has remained stable in recent years, the share of self-employed workers without employees continues to grow and within that “part-time self-employment” has been increasing in 25 out of 31 OECD countries during the last decade, with a high incidence among female, young, or low-educated workers. Unless we change policy course, we can expect an ever more outsourced, fragmented and on-demand work force that would make organising and collective bargaining more difficult as it is not always clear who the employer is, and what the status of the worker and it not clear if conflicts with other laws and regulation can be resolved.
Digital-driven disruptions affects the way we regulate. It affects all the key stakeholders, those who hold a claim against the firm: workers, users, consumers, the tax collector among others. The “boundaries” of the firm become less clearly defined. Increasingly companies do not follow a single economic entity structure. They are increasingly “emptied” from within, with a HQ controlling ownership over the brands and intellectual property rights, all the hard-to-value intangibles, with the “rest” being composed of a myriad of offshores holdings and outsourced satellite companies. If you can’t regulate businesses anymore, there is a greater chance that you let business become less accountable to stakeholders (workers, tax collector, the environment, the consumer, etc.), with too much market power. That is perhaps the current reality of the digital economy with global intermediaries being able to accumulate abnormal levels of wealth and exert abnormal influence over the rest of the economy (with yet, very small if not zero economic and employment footprint).
The OECD response: empowering businesses, investors, traders…
A central recommendation that you will here at the OECD is to promote business dynamism, reduce barriers to market entry, increase competition, facilitate trade liberalisation and foreign investment, as seen in the 2018 edition of its Flagship publication Going for Growth. The classics. Two core principles emerge of this policy package: (i) domestically, the empowerment of businesses and entrepreneurs against unfair competition and market concentration and against limited access to finance and (ii) internationally, the protection of the fundamental rights of exporters, of traders, and of foreign investors.
… and individuals
The terms “empowerment” and “fundamental rights” are here used for the purpose of underscoring what perhaps is a double standard treatment. The OECD is fairly vocal in defending the right of entrepreneurs, investors and of traders, seen as collective groups. When it comes to empowering workers and protecting their rights, it is however a less clearer picture that emerges. The primary response of the OECD when it comes to workers seems very much in granting “individuals” better access to skills, with an added layer of social safety nets, better designed, and better-targeted active labour market policies. These are much needed we agree, but they offer an incomplete response if they treat workers as individuals, not as a group. As Richard Trumka said at the OECD “We must stop the double standard where we refer to the employer community and the investor community, but then talk about solutions for workers as if we can make it on our own as isolated individuals”. In that context, the mantra “protect the worker, not the job” might look attractive on paper, but once you scratch the surface, at the OECD it soon becomes an implicit call for flexibility without collective security — especially when the funding and financing aspects are not clarified and secured.
The revised Jobs Strategy & the Inclusive Growth Framework
The OECD is a big machinery. It would be simplistic to picture the Organisation as having a single voice and a single unitary position set in stone on every topic. In May last, it adopted two blueprints for structural reform — a revised Jobs Strategy and an Inclusive Growth Framework — that signal a shift from the old recipes of the past. On minimum wage, the OECD position has changed and for the better. It now recognises that it is a powerful instrument to lift wages at the bottom, although it still expresses concern about the risk of pricing workers out of a job. The revised Jobs Strategy openly calls for promoting “inclusive collective bargaining” which in turn “can help to promote a broad sharing of productivity gains while providing flexibility for firms”. In the recent Employment Outlook 2018, the OECD in fact makes a case for co-ordinated collective bargaining systems that combine company- and sector-wide agreements (the Nordic countries) as models that clearly outperform the fully decentralised systems (Common law countries, Chile, the Baltic countries, among others).
The OECD also appears to be less concerned about employment protection legislation which is recognised for protecting workers against “abuses” and for “limiting excessive turnover” (but as long as these protections are not “overly restrictive”). With regard to the specific challenge of non-standard forms of work, the OECD response is unclear. It welcomes the “innovative approach” and the flexibility that are offered but also recognises the threats to job security.
Saying it loud and clear
The OECD has more positive messages to share today than in the past on the need for job security and the role of collective bargaining. But it is still one-step away from bringing these upfront in the OECD core indicators to measure employment resilience and adaptability in both the revised Jobs Strategy and the Inclusive Growth Framework. The OECD is whispering that collective bargaining is good for all, not necessarily making it loud and clear. In many ways, the labour market is still treated as just a market, where supply and demand adjust naturally (and where indeed labour is a commodity). The proposition that employers could possibly exert unilateral power to set wages on workers — the existence of labour market monopsony — has yet to be a convincing one at the OECD.
Business responsibility and the changing nature of business
The OECD offers both promising and less promising perspectives when it comes to firm-level aspects. On business responsibility to uphold human rights within its operations and in the supply chain, it definitely has acquired leadership with the MNE Guidelines for MNEs and the new OECD Due Diligence Guidance. It also has the right approach when it comes to corporate tax accountability, although perhaps the current BEPS plan could deliver better outcomes with regard to country-by-country reporting and transfer pricing rules. The OECD is also discovering the virtues of social dialogue with its support for the Global Deal initiative and the partnership with the ILO.
However, it is not there yet with respect to corporate governance and the changing nature of the firm. Economists like to see the company as a single, simple, clearly identifiable, statistically controllable object, a spot that is blinking on their computer screens. The reality seems rather different: rather than a single entity, corporations increasingly are an aggregation of outsourced & arms-length entities circling around a bright star, the headquarters. And it is not there yet in addressing corporate short termism. As we speak, the risk for massive shareholder value extraction through dividends and buybacks is not really a concern for the OECD.
But things may be changing. Recently the OECD held a workshop on Corporate Governance for Sustainable Prosperity, including a present by the US academic expert William Lazonick. Historically the OECD has not been a fervent partisan of a stakeholder approach to the governance of the firm to say the least. Yet, in the latest edition its Employment Outlook, the OECD recognises the positive contributions of worker representation within firms (works councils, board level employee representation) to the quality of the working environment, including access to skills.