Politics of Poverty

Concerned about inequality? Skip the Davos panels & start paying living wages

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The World Economic Forum takes place annually in Davos, Switzerland. This year, attendees included a wide variety of business leaders, politicians, celebrities, philanthropists, and academics, including: Vice President Joe Biden, Melinda Gates, Leonardo Dicaprio, and Sheryl Sandberg. Photo: Fabrice Coffrini/AFP/Getty Images

We know the state of global inequality is stark – and more discussions won’ t change that – but living wages would.

Last week, 2,500 members of the world’s political and economic elite descended on a ski resort in Davos, Switzerland for a week of lavish meals and conversation at the World Economic Forum. The many keynote speeches, plenaries and panels focused on the state of the global economy, and often addressed growing economic inequality — themes highlighted in Oxfam’s latest report “An Economy for the 1%.” Many CEOs and leaders worried aloud whether growing economic insecurity would begin to translate to political unrest or threats to economic markets.

That’s one concern; but for most of us, the concern is that we are seeing less and less of the economic benefits of working hard and playing by the rules. While much of the buzz around Oxfam’s most recent report focused on tax havens (and rightly so), the report also pointed out we must pay attention to the falling value of wages, and what that means for the widening gap between the rich and the rest of us.

In many countries, inequality starts in the labor market – and as wage growth declines, the economic gap yawns ever larger. In the US, shifts in wages account for most of the dramatic growth in inequality in the past decade. Over the last 30 years, the share of economic gains going to workers has been decreasing in almost every wealthy country, and in most poor and middle income countries as well, over the past decade.

Labor income as a share of GDP in countries of different income levels

Graph 1
Source: Oxfam’s “An Economy For the 1%” report

Simply put, the vast majority of workers are seeing less and less of the benefits of hard work. Instead, the fruits of their labor are going to the folks at the top.

Despite productivity continuing to rise, real wages have not kept pace. This is important. The connection between working hard and producing economic value has become less linked to the prosperity of workers and their families. This has the hardest impact on the most vulnerable: low-wage workers, (particularly women), are actually in a more precarious financial condition, in a richer economy, than they were a few years ago.

The US has the highest proportion of low-wage workers of any wealthy nation, so the disconnect between productivity and wages is a real threat to the well-being of tens of millions of Americans and the economy at large. Part of this is due to the federal minimum wage being stuck at a paltry $7.25 an hour for eight years, driving down wages of low wage workers. If it had grown in line with productivity between 1968 and 2012, it would be near $22 today.


Graph 2
Source: Oxfam’s “An Economy For the 1%” report

Meanwhile, at Davos, many blame technology for driving down wages. However, experts have raised serious questions about this theory. Certainly the rise of robots and new technologies are changing industry; but technology hasn’t led to a downward trend in CEO pay. In 2012, the Organization for Economic Cooperation and Development (OECD) found that while low-wage workers in OECD countries overall have seen their incomes fall, incomes for the top 1 percent have increased by 20 percent over the past two decades. The dramatic increases in CEO pay speak for themselves. The average salary (including bonuses) of a CEO at one of the top 350 US firms in 2014 was $16.3 million – up by 54.3 percent since the economic recovery began in 2009. High CEO salaries have a spillover effect, increasing the pay of other executives and managers, and contributing to the rise in income of the top 1 and .1 percent.

Wage inequity doesn’t just happen naturally. In fact, it’s often the result of decisions by political and business leaders – many of them at Davos. Among corporate leaders on stage you’ll find representatives of some of the nation’s largest employers like Hewlett Packard, UPS, General Electric, Citi and JP Morgan Chase. Every day these companies, and other not at Davos, make decisions: increase pay of the CEO and executives or workers? Engage in stock buyback schemes or increase dividends to shareholders? Pay workers a living wage? Ensure female workers are paid equitably? Invest in lobbyists to stop increases in the minimum wage or thwart collective bargaining?

As Vice President Joe Biden said at the opening plenary in Davos, the CEOs in attendance have an opportunity and a duty to be a part of the solution to inequality. He cited a Harvard Business School study of 449 companies in the S&P 500 which made $2.4 trillion in profit. Instead of investing in workers and local economies, the companies sent 54% of their profits to stock buybacks, 37% to shareholder dividends, and just 9% to research and development, cash reserves, raises and training for workers. He then said:

“It all comes back to countries and companies giving people a fighting chance to get into the middle class… I’d like to make a call to action to business leaders here to invest in your workers…Embrace your obligation to workers as well as your shareholders.”

To quote someone not at Davos, perhaps what we need is “a little less conversation, a little more action” (H/T to the King of Rock). We need the very companies at Davos to invest more of their profits into living wages, and setting and enforcing standards to ensure suppliers and contractors do so as well. Some companies already do this: Uniliever is exploring living wages in their supply chain, and Mark Bertolini of heathcare giant AETNA raised the wage floor for workers to $16 an hour.

To tackle the challenge of inequality, more companies need to commit to living wages.

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