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Analysis/Comment Last Updated: Jan 9, 2015 - 5:23 AM

Globalization's new normal needs permanent underclass - Part 1
By Michael Hennigan, Finfacts founder and editor
Oct 17, 2014 - 7:28 AM

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Changes in the shares of wealth held by different segments of the wealth distribution have been less cyclical than income. The wealth share of the top 3% climbed from 44.8% in 1989 to 51.8% in 2007 and 54.4% in 2013. As with income, the shares of wealth held by the next 7 highest percentage of families changed very little, hovering between 19 and 22% over the past 25 years, and registering 20.9% in 2013. Similar to the situation with income, the rising wealth share of the top 3% of families is mirrored by the declining share of wealth held by the bottom 90%. The share of wealth held by the bottom 90% fell from 33.2% in 1989 to 24.7% in 2013 — US Federal Reserve Survey of Consumer Finances

Globalization has been the key driver of countries as diverse as Ireland and China escaping from extreme poverty but in recent times the hopes that a rising tide would raise all boats have been dashed. What is increasingly evident is that a permanent underclass is required to underpin the system—in both the rich and emerging economies.

Prior to 2008, rising house prices and easy credit masked trends that began to accelerate from the late 1980s while economists in the West highlighted the imperative of more knowledge-based jobs and their mantra was "moving up the value chain."

Today there is a struggle in Europe for "competitiveness" and while Italy for example has much room for improvement in upgrading archaic regulations, it is an impossible challenge in the long term when the global market workforce has doubled in recent decades.

Globalization, the underclass and the need for a new model - Part 2

Globalization, technological change and GDP's disconnect - Part 3

We use the term 'underclass' in a broad sense where through globalization and technological developments, there is a rise in high-paying and low-paying jobs while middle-income jobs, which include administration and production roles, are falling. Meanwhile, emerging economies also depend on low-paid employees, whether immigrants or rural residents who may have less rights than urban residents.

In the US outsourcing and automation of manufacturing has been replaced with low-paying services jobs for a significant number while the owners of capital make big gains; similar trends are evident elsewhere.

Last month the Centre for Cities, a UK think-tank, published a report supported by the Joseph Rowntree Foundation, which identified a long-term shift towards insecure, low-paying employment in many cities across the UK, threatening the future strength and stability of the national economy.

The report found that:

  • Between 2001 and 2011, the number of Britons employed in low-pay positions in UK cities increased by over 750,000 people, as those in ‘mid-range’ positions decreased by almost 200,000;
  • Over 20% of all UK employees are now working for low pay; and
  • There are now more employed than unemployed UK households in poverty.

Germany has access to labour across its borders that is a quarter of average German labour costs; the US has Latin America and China for cheap labour and work that natives are not keen on doing at survival levels—the US labour participation rate was 62.7% in September, the lowest rate since 1978 when married women began joining the workforce.

Developments in two advanced economies, Japan and South Korea, are instructive as to how countries can evolve as rich-poor economies, where a third or more of their workforces are poorly paid temporary workers.

Japan's Labour Market: Lifers, temps and banishment rooms

South Korea: A rich/ poor country - grim model for future world of irregular work?

On Tuesday in his Budget speech, Michael Noonan, finance minister, indirectly pointed to a gulf in Ireland when he defended a pension levy on private sector workers to fund job creation—the same rate applied to funds irrespective of income while only just over 40% of the private workforce have occupational pension coverage. The minster has 3 public pensions with guaranteed payouts.

Janan Ganesh, the perceptive Financial Times political columnist wrote in 2013 on falling real earnings in Britain in particular:

Western electorates have long viewed globalisation as a menace to their livelihoods, but their leaders are barely wiser about viable solutions. In the 1990s, it was hoped that investment in 'human capital' would see off the threat of wage competition. Our workers might be costlier but they would also be better. But results have been patchy at best and it takes a very sunny disposition to believe that the ideas now in vogue— fiddling from the right, daydreaming from the left— will fare much better."

On the rise of Ukip, the anti-EU and immigration party, Ganesh wrote this week "who is worse: the elitist who shrugs at people left behind by the modern world, or the huckster who offers them false hope?"

Richard Freeman, the Harvard economist, has calculated that:

In 1980 the global workforce consisted of workers in the advanced countries, parts of Africa and most of Latin America. Approximately 960m persons worked in these economies. Population growth—largely in poorer countries—increased the number employed in these economies to about 1.46bn workers by 2000.

But in the 1980s and 1990s, workers from China, India and the former Soviet bloc entered the global labour pool. Of course, these workers had existed before then. The difference, though, was that their economies suddenly joined the global system of production and consumption.

In 2000, those countries contributed 1.47bn workers to the global labour pool—effectively doubling the size of the world’s now-connected workforce."

Big US companies are no longer big employers. For example, General Motors had over 618,000 employed in the US in 1979—in well-paid jobs; today, General Electric employs 133,000 and Apple 50,000.

General Motors' worldwide employment in 1979 was 853,000. Today it is about 202,000 with 80,000 employed in the US.

Apple said this year that 30% of its global workforce of 80,300 full-time staff in September 2013 was female, in line with the gender breakdown at Google and Yahoo while 55% of its 50,000 US staff was white and 15%  Asian, with Hispanics and blacks accounting for 11% and 7%, respectively.

Apple runs 254 retail stores in the United States and 427 globally employing 43,000.

What is interesting about pay trends is that two-thirds of Apple US staff are in retail and were paid an average of $25,000 annually in 201 2 according to The New York Times.

So wage compression down the economic pyramid is the striking development including at one of the world's most valuable public companies, that can command a global price for its products.

In 2013 the median income of the typical American household in inflation-adjusted terms was lower than the level in 1989 -- 25 years ago.

Towards the top of the pyramid, the owners of shares have seen their values boosted by the US government (Federal Reserve) and this week the Credit Suisse Global Wealth 2014 shows that the number of so-called ultra high net worth (UHNW) individuals—whose net worth exceeds more than $50m—has risen globally to 128,200 with the United States leading by a huge margin with 62,900 UHNW adults, equivalent to 49% of the global total.

While wages have declined across all sectors in the years following the financial crash of 2008, low-paid workers have been hit the hardest, the US National Employment Law Project (NELP) reported last August. NELP analysed five groups of median wages in its report, titled An Unbalanced Recovery: Real Wage and Job Growth Trends [pdf].

Since the start of the rocky recovery in 2009, while higher-income sectors saw a fall of between 2.1 and 2.5% (e.g. bonus declines), workers in the three lowest-paid groups were hit much harder, with wage falls of between 3.6 and 4.6%. Some of the hardest-hit jobs within the three lowest-paid groups were maids, housekeepers, home health and personal care aides, and restaurant workers, whose wage dip ranged from 5.8 to 8.3%.

The study also found that low-paid jobs are on the rise. Despite the stagnant or falling level of wages more people found work in lower-paid occupations than in any other industry in the past year.

Low-wage and mid-wage jobs constituted accounted for a combined 67% of US job growth from July 2013 to July 2014.

In the period to 2022 low-paid home health aide jobs will have the greatest growth.

Emerging economies also need an underclass.

In India, Siddharth Kara in his book, 'The medieval system of bonded labor traps millions of workers worldwide for life,' writes that “the persistence of bonded labour in South Asia is driven by the ability to generate substantial profits at almost no real risk, through the exploitation of an immense underclass of systemically impoverished and vulnerable people.”

See Harvard University article here.

Dr. Michael Spence, a winner of the 2001 Nobel Prize in Economic Science and chairman of the Commission on Growth and Development, said in 2008 that sustained high growth in developing economies is a recent, post-World War II phenomenon. Using GDP figures, "high" is above 7% and "sustained" is over 25 years or more, he said that while these cutoffs are arbitrary, a similar picture emerges with variants. Growth at these rates produces very substantial changes in incomes and wealth: Income doubles every decade at 7%.

There are 13 such cases of sustained high growth, and nine are in Asia. These are Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan , and Thailand.

"Each and every one of these miracles had an export sector as a driver of growth and an increasing share of trade in GDP. There are no exceptions. Every growth miracle involves leveraging the demand and resources of the global economy."

That is an impressive story but it cannot be taken for granted.

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