Three Rules of Thumb to Raise Wages and Reduce Inequality

Demonstrators rally for a $15 minimum wage before a meeting of the wage board in New York, Monday, June 15, 2015. The board,
Demonstrators rally for a $15 minimum wage before a meeting of the wage board in New York, Monday, June 15, 2015. The board, created by Gov. Andrew Cuomo, will consider a minimum wage increase for New York's fast-food workers. (AP Photo/Seth Wenig)

This post is co-authored by Gregory Randolph, Deputy Director of the JustJobs Network.

Inequality has taken center stage as one of the defining issues of our time. We see it played out in concrete ways - from the skyrocketing cost of rent in major cities to the crippling debt of college graduates - and in staggering statistics, like the fact that the richest 1 percent control nearly half of the world's wealth.

When a traditionally neoliberal institution like the International Monetary Fund acknowledges that inequality makes it difficult to sustain growth, and that some redistribution would not be bad for growth, it is evidence of a growing consensus that governments must rein in soaring inequality.

Increasing wages is the most direct way to make a meaningful dent in inequality. Sustained growth in workers' wages would also spur a real recovery from the Great Recession and support the private sector - providing the boost to aggregate demand that the global economy desperately requires.

Inequality has grown so dramatically in part because labor's share of national income has declined consistently in most countries since the 1980s. Among nations in the Organisation for Economic Co-operation and Development, the share of income taken home by labor fell from 66 percent in the 1990s to 62 percent in the 2000s - a significant drop for an indicator that held steady throughout the 20th century.

But while the consensus is growing that boosting wages is key to addressing inequality and stimulating economic recovery, the path to achieving this is murky at best. The main question facing policymakers around the world is: How can wage growth best be promoted without sacrificing competitiveness?

This is the question the JustJobs Network explores in a new volume: Global Wage Debates: Politics or Economics? Case studies from Brazil to China, from the United States to Germany, reveal that to square higher wages and competitiveness, governments must adhere to three rules of thumb.

First, keep politics out. These days, a politician's poll numbers spike in direct proportion to how much he or she promises to increase the minimum wage. Wage setting has become less about social concern for workers, or economic concern for business, and more about political expediency.

Experiments with more rational and less political wage-setting mechanisms have showed positive results around the world. Notwithstanding its current economic turmoil, Brazil's policy of linking minimum wage growth with inflation and economic growth dramatically lowered inequality in the first decade of the 21st century. As an illustration, illiterate wage workers in Brazil earned 10 times less than college graduates in 2001; by 2011, college graduates earned only four times more on average.

Reducing the role of political whims in wage setting guards against the kinds of drastic, sudden wage hikes that are unrealistic for businesses and ultimately hurt the job market - while also ensuring that entrenched private sector interests do not impede wage growth.

Second, boost workers' productivity. When productivity gains do not feed back into fair compensation for workers, inequality grows. But the reverse - increasing wages with minimal productivity growth - can also endanger workers' livelihoods.

Wage hikes unaccompanied by gains in labor productivity are unsustainable. One of the ways governments can enhance worker productivity is by investing in skills training, health services and education. For example, a case study in Egypt showed that investments in women workers' health cut both absenteeism and turnover in half - boosting productivity.

Governments should also commit to raising minimum wages in a gradual way, so that companies have the chance to make their own productivity-enhancing investments in their employees.

Third, reinforce the role of unions. A statutory minimum wage should be an absolute compensation floor to protect the most vulnerable workers and new hires. But workers must have compensation ladders that extend beyond the statutory minimum wage, and that requires cooperative bilateral relations between employees and employers.

Collective bargaining and a healthy industrial relations system help to construct compensation ladders for workers to ascend. This paves a pathway for economic mobility.

And contrary to popular understanding, collective bargaining is good for businesses, too. As opposed to a system that relies on minimum wage alone, countries with cooperative traditions of collective bargaining offer employers the ability to design a compensation structure that matches the specific needs of their business and is correlated with experience, skill, and productivity levels.

Good wages are as economically wise as they are socially just.  They help businesses find new consumers. And they ensure that the workers who power the global economy benefit from, and have a stake in, its expansion.