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â A deep divide: The US elections have once again revealed a crass and deepening rift right through the middle of US society. Similar, if often still less dramatic and consequential, schisms exist across much of the developed world. The reasons for the rifts extend well beyond the realm of economics, apparently reflecting cultural issues and the ease of communicating in echo chambers that amplify perceived grievances, to name just a few factors. However, rapid structural change away from fairly secure full-time jobs in traditional industries and widening income and wealth inequalities in many parts of the developed world have contributed to a backlash against globalisation, science and established conventions.
â A glimmer of hope? Economists cannot judge the non-economic factors. But they can look at wage and labour market trends. Before the pandemic struck the world early this year, sustained gains in employment were starting to raise the bargaining power of workers in many countries ranging from the US to Germany. This contributed to a rise in the compensation of employees as a share of national income, which came after decades of trend decline (see chart). It also underpinned a pickup in real wages and a narrowing in some measures of income inequality. In the US, for instance, the share of families in the lowest income quintile, which had fallen from 4.6% of total income in 1990 to 3.6% in 2013/2014, recovered to 3.9% in 2019. While all such measures are problematic, taken together, they do indicate some improvement. If this trend resumes once labour markets have recovered from the pandemic, it could eventually help to mitigate at least one of the sources of widespread discontent in developed countries. This is a critical issue not just in the US policy debate.
â Beyond the cycle: Some of the immediate pre-COVID gains in wages reflected the maturing business cycle. But demographics suggest that the supply of labour will tighten further on trend in the future as populations in major economies continue to age. Having troughed between 2020 and 2015, dependency ratios look set to rise in the US, Europe and China for the foreseeable future. See our closer look at demographic factors in Trends of the decade: Inflation outlook.
â Higher rewards for labour ahead? Beyond a more limited supply of labour, two further economic factors may lead to more bargaining power for workers and higher wages in the future. First, as societies get richer and older, the demand for labour-intensive services such as healthcare, nursing care and entertainment may increase. Second, rising productivity gains from the ongoing rapid diffusion of technologies through traditional service and production industries can contribute to faster real income growth once advanced economies reach full employment. In addition, well-judged policies to redistribute more income towards the least well off – without hurting the private profit incentive too much – can accentuate the likely faster gains in real incomes.
â Taking the long view: Whether or not real wages will rise faster and in a more equal fashion in the future – and whether this will indeed help to rein discontent in society at least somewhat after a while – remains to be seen. But as we contemplate the deep polarisation in society and its potential reasons, it is worth remembering that fundamental trends can and do change. It need not get worse and worse but may even get better again eventually.
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