Flash Economics. Are the elites unaware that there is a problem? 05 September
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1 Are the elites unaware that there is a problem? 05 September An increasingly widespread theory is that the "elites" do not see the problems the population in OECD countries are facing: stagnation in purchasing power, growing inequalities, unemployment among the least skilled, exclusion, etc. This accusation is not very accurate: the "elites" (and at least the economists) understand that a very dangerous development is at work: labour market polarisation, with concentration of jobs at the two extremes (skilled high-income, unskilled low-income); this comes on top of a decline in productivity gains. The problem is therefore not that negative developments are being ignored, but the lack of solutions: contemporary economies spontaneously generate labour markets polarisation and no longer generate strong productivity gains; this is not a choice, but the economies spontaneous dynamics that are difficult to change. Patrick Artus Tel. (33 1) patrick.artus@natixis.com CORPORATE & INVESTMENT BANKING INVESTMENT SOLUTIONS & INSURANCE SPECIALIZED FINANCIAL SERVICES Distribution of this report in the United States. See important disclosures at the end of this report.
2 Are the "elites" blind? A widespread theory nowadays is that the "elites" (politicians, corporate leaders, senior civil servants, intellectuals, economists, etc.) cannot see the problems the population in OECD countries are facing, and therefore, since they are blind and fail to understand the rise of populism and the rejection of the current economic system. The population in OECD countries is actually facing: - Low growth in purchasing power (Chart 1) in Japan, the euro zone and the United States; - A rise of inequalities: the middle class and the lower middle class have stagnant or falling real incomes (Table 1 shows the example of the United States), the richest take a growing fraction of the overall income (Chart 2) in the United States, the United Kingdom, Germany, Japan and Italy; - Exclusion: Table 2 shows the proportion of NEETS (young people not in employment, or training) increasing everywhere except in Japan and Germany; - High unskilled unemployment (Table 3) in France, Spain and Italy. Chart 1 Real per capita wage (deflated by consumer prices, 1998:1 = ) Chart 2 Share of national income held by the 1% of individuals with the highest income United States (excl. benefits) United Kingdom Euro zone Japan United States United Kingdom Germany France Spain Italy Japan Sources: Datastream, national sources, Natixis Sources: Datastream, Piketty & Saez, PSE, Natixis Table 1: United States: Average real household income received by each (in constant 2014 dollars) Lowest Second Third Fourth Fifth The 5% of households with the highest income 19 12,594 31,87 52,338 78, , , ,254 30,778 51,123 77, , , ,000 30,08 50,58 77,75 150, 239, ,877 30,109 50,471 78,434 13,415 2, ,195 30,391 51,198 79,70 17, , ,883 31,488 52,50,935 18,0 291, ,919 31,709 53,33 82, ,20 302, ,004 32,511 54,9 84,71 1,14 31, ,388 33,5 5,54 87, , 322, ,092 34,03 57,920, , , ,93 34,83 58,058, ,578 34, ,553 34,055 57,002 89, , , ,14 33,424 5,324 88, ,15 330, ,87 33,052 5,10 88,9 189, , ,839 32,852 55,1 87,7 189,2 330,750 2
3 Lowest Second Third Fourth Fifth The 5% of households with the highest income ,91 33,14 5,129 88, , , ,329 33,791 5,23 89,2 197,4 349, ,189 33,17 57,055, , , ,817 32,45 55,124 87, , , ,747 32,283 54,57 8, , , ,938 30,982 53,389 85,49 183, , ,831 30,742 52,47 84, , , ,848 30,20 52,772 84,54 187,58 327, ,784 31,317 54,20 87,888 19,51 339, ,7 31,087 54,041 87, , ,347 Sources: US Census Bureau, Natixis Table 2: Trend in the percentage of young people aged 15 to 29 not attending school and without employment (as % of the population of the same age group) Country United States NA United Kingdom NA NA Germany NA France Spain Italy Japan* (*) Aged 15 to 24 Sources: OECD, Natixis Table 3: Unemployment rate by level of (as %) Year secondary Germany secondary France 1998 NA NA
4 Year secondary Spain secondary Italy Year secondary United States secondary United Kingdom NA NA NA NA NA NA
5 Year secondary Japan NA NA NA NA Sources: OECD Education at a Glance, Eurostat, Natixis These developments to a large extent explain the increase in social unrest, the rejection of the economic model, and the rise of populist parties. But the elites are not blind; rather, they do not know how to react. The economies spontaneous, endogenous dynamics Spontaneously in OECD countries since the late 19s There is a polarisation of labour markets: - Intermediate jobs in industry and industry-related services are gradually disappearing (Chart 3); - Jobs are concentrating at the two extremities of the labour market: skilled jobs in new technologies (Table 4), sophisticated business services and financial services (Chart 4); the number of these skilled jobs is limited, especially as new technologies are becoming a mature business; and unskilled jobs in unsophisticated domestic services (Chart 5); - This development explains the frustration of the middle class and the increase in inequalities caused by the low level of wages in domestic services (Chart ). Even though jobs are being created in unsophisticated domestic services, the number of these jobs is insufficient to reduce unskilled unemployment in many countries. Moreover, persons with intermediate training levels are forced to switch to unskilled service jobs and thereby squeeze out less skilled persons. 5
6 Chart 3 Employment in the manufacturing sector (1998:1 = ) United States Euro zone United Kingdom Japan Chart 4 Employment in business and financial services (1998:1 = ) United States United Kingdom Euro zone Japan Sources: Datastream, national sources, Natixis Sources: Datastream, Eurostat, Natixis Chart 5 Employment in domestic services* (1998:1 = ) Chart OECD*: Level of per capita wage*** (in thousands of USD per year) United States United Kingdom Euro zone Japan (*) Retailing + restaurants + hotels + leisure + transport + other consumer services Sources: Datastream, BLS, Eurostat, MIAC, Natixis Manufacturing sector Business and financial services sectors Domestic services sector** (*) United States + United Kingdom + euro zone + Japan (**) Retailing + restaurants + hotels + leisure + transport + other consumer services 25 (***) Payroll excl. social contributions/employment 20 Sources: Datastream, BEA, BLS, Eurostat, CAO, Natixis Table 4: Employment in the information and communications technology sector (ICT, as % of total employment) United States United Kingdom Euro zone Japan 1998 NA 3.44 NA NA 3.45 NA NA NA 3.42 NA NA Sources: OECD, OECD Digital Economy Outlook 2015, Natixis
7 These developments are exacerbated by the decline in productivity gains The labour market is suffering from the polarisation of jobs, but also from the across-the-board decline in productivity gains (Charts 7A, B, C and D), which is leading to sluggish growth in real wages (Chart 1 above) Chart 7A United States: Per capita productivity* 1998:1 = (LH scale) Y/Y as % (RH scale) (*) Non-farm business Chart 7B United Kingdom: Per capita productivity 1998:1 = (LH scale) Y/Y as % (RH scale) Sources: Datastream, BEA, Natixis -1-2 Sources: Datastream, ONS, Natixis Chart 7C Euro zone: Per capita productivity Chart 7D Japan: Per capita productivity :1 = (LH scale) Y/Y as % (RH scale) :1 = (LH scale) Y/Y as % (RH scale) Sources: Datastream, Eurostat, Natixis Sources: Datastream, CAO, Natixis There are several likely causes for the low productivity gains: the distortion of the economy towards services (Chart 8) where productivity gains are lower, the stagnation of the size of the new-technology sector (Table 4 above), and the lack of positive effects from digital technology on labour productivity for the time being. Chart 8 OECD*: Real GDP growth and manufacturing production (1998:1 = ) Real GDP Manufacturing production (*) United States + United Kingdom + euro zone + Japan Sources: Datastream, Natixis 17 7
8 The unpleasant developments in the labour markets (inequalities, contraction in the middle class, small increases in the standard of living) are therefore due to the economy s spontaneous dynamics: creation of very skilled or unskilled jobs, low productivity gains. Persons who have intermediate training levels can no longer find intermediate jobs - and the number of these jobs is declining - and must take unskilled jobs, which ultimately increases the unskilled unemployment rate. Conclusion: It is not that the "elites" are short-sighted; the problem is that they do not know what to do The "elites" in OECD countries understand that there are problems of inequality, unskilled unemployment, purchasing power, etc. The problem of the "elites" is not near-sightedness, but helplessness: - What can be done if the distortion of demand towards services leads to the disappearance of industry and industry-related services and leads to creation of unskilled jobs in domestic services? - What can be done if the economy s sectoral structure and weak technological progress lead to a slowdown in productivity gains and therefore in real wages? There is no obvious economic policy that can prevent the destruction of intermediate jobs or the slowdown in labour productivity. 8
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