Wake-up call

Construction workers at a site in Chennai. In India, the ILO report says, casual workers earn 45 per cent less than regular workers.-S. THANTHONI

THE World of Work Report 2008: Income Inequalities in the Age of Financial Globalization, produced by the International Labour Organisations (ILO) International Institute for Labour Studies, could not have come at a more appropriate juncture. In the preface, Juan Somavia, Director-General of the ILO, notes that its findings are published at a time of great financial, economic and social stress marked by one of the most severe crises in recent times. It is now an accepted fact that several developed and developing economies have entered into recession, and unemployment is rapidly on the rise. The real extent and impact of the crisis will not be known immediately though the overall portents are not favourable.

The main theme of the report is that the period of economic expansion from the early 1990s was accompanied by wide income inequalities and the employment situation has been impacted negatively by the economic slowdown. Growth, it says, turned negative in a number of countries, including France, Germany, Japan and Italy. But despite substantial capital flows across the globe, financial globalisation did not improve employment growth, and capital outflows of excess savings from the less developed economies to more developed economies was still taking place. More importantly, the report concedes that financial liberalisation has had its impact on macroeconomic performance and income inequality as it influences national policies in a manner that benefits capital owners. Financial globalisation has eroded the bargaining power of employees and contributed to the trend of declining wage share in income. Governments, the report says, must take into account the social impact of financial globalisation before engaging in an all-embracing opening of capital markets.

What this particular report addresses is, perhaps, not so much the cause of the crisis but what it calls its structural dimensions, one of them being the widening of income inequalities that preceded the crisis, which has become worse post-crisis. The rise in the prices of fuel and food, items for which there are virtually no substitutes, has hit the poor hard. The report is a wake-up call to all governments.

The report does not suggest any strong policy prescriptions, neither does it have an analysis of why certain countries or regions are experiencing greater income and wage disparities than others. The lessons, if any, are to be learnt from the policy experiences of those countries that have been able to, to some extent, cushion lower-income groups from the economic slowdown. Maybe the time has come for the ILO to put in strong prescriptive measures for governments rather than just stop with analysing the problem at hand. However, in stating the extent of the malaise, the report definitely conveys some strong messages. It warns that if income inequalities rise to excessive levels, the social support for pro-growth policies will actually decline: among middle- and lower-income groups if they feel that such policies do little for them while favouring higher-income groups and among the economically strong if they fear that opportunities may be too widely distributed.

The report states rather mildly that already there are widespread perceptions in many countries that globalisation does not work to the advantage of the majority of the population. This is a welcome observation as it challenges the idea of the inevitability of the current trajectory of globalisation, which the governments of many countries in the developed and developing world, and their intelligentsia, had come quite willingly to accept. The report advocates a regulatory framework for globalisation that includes a governance structure at the international level, but there is little consensus on how to go about it.

The report highlights what critics of neoliberal economic policies, including trade unionists the world over, have all along been pointing out: that the economic slowdown is affecting low-income groups much more than other segments of the population. There is also a growing acceptance of the fact that the gains of employment growth are not being realised equitably across all sections of the population. In many regions, the report says in its very first chapter, titled Trends in employment and inequality, while world employment grew by about 30 per cent in the early 1990s until 2007, women continued to represent a disproportionate share of unemployed persons. However, in 51 out of 73 countries for which data are available, the share of wages in total income declined over the past 20 years. In 24 out of 32 countries, productivity growth exceeded wage growth, which meant that labours share of income fell. China and South Africa have performed much better than India and Brazil in productivity growth. Of 32 countries, the report states, Chinas performance was the best in terms of wage and productivity growth.

It goes on to say that South Africa, though to a lesser extent than China, saw a growing wage share and strong real wage and productivity growth rates. On the other hand, productivity growth outpaced wage growth in both India and Brazil (which experienced negative wage growth). Overall, any increase in the wage share that occurred in the OECD [Organisation for Economic Co-operation and Development] countries in the early 2000s did not make up for the decline that had already taken place in the 1990s.

Interestingly, between 1990 and 2005, two-thirds of countries went through an increase in income inequality where the incomes of the richer households increased relative to those of the poorer households. In the same period, the income gap between the top and the bottom 10 per cent of wage earners increased in 70 per cent of the countries for which data are available.

The report brings out some interesting figures of wage disparity within organisations, that is, between bosses and average employees. For instance, in the United States, in 2007, the chief executive officers (CEOs) of the 15 largest companies earned over 500 times more than the average worker. The report says that the rise in executive pay, which is sometimes regarded as the driver of income inequality, has been a topic of discussion for some time now but has attracted more attention only now in the context of the financial crisis. The highest-paid CEOs, the report says, are in the U.S., where the average pay exceeds $10 million a year; this works out to about 183 times the wage of the average American worker.

There were reductions in income inequality in Sub-Saharan Africa and West Asia though in the former the levels of inequality remained high. Among the advanced economies, the report notes, only Denmark, France, Germany and Switzerland recorded declines, while Belgium, Finland and Sweden recorded the largest increases. Despite the increase, the levels in these countries were still much lower compared with other regions, including the Republic of Korea (South Korea), the United Kingdom and the U.S.

Chapter 4 of the report is titled Changing employment patterns. It states that the incidence of non-standard employment has tended to increase in the majority of countries for which information could be collected. Non-standard jobs, that is, jobs in the informal sector, are those in which the remuneration is much less than what is offered for standard or formal sector jobs. This is the case everywhere, only the extent of the difference varies. In Europe, apparently, temporary jobs pay, on average, 20 per cent less than permanent jobs, while in Latin American countries, workers with informal jobs earn, on average, 43 per cent less than those with formal jobs. In India, the report says, casual workers earn 45 per cent less than regular workers.

The report is an eye-opener though some of the things that have been written in it have been stated over the years by those who have criticised the effects of globalisation and financial liberalisation. At one stage, arguing from a long-term perspective regarding economic growth, the report seems to suggest that eventually the benefits of financial liberalisation will outweigh the costs of the crisis. But the world is a long way from that.