January 11, 2013 by Shawkat Hammoudeh
A question that puzzles many people in the United States is how companies can make good profits while the American economy is virtually in a slump. This question is relevant because it has significant bearing on rising income inequality and the changing role of education and skills, which has been a hot issue for those who are interested in income distribution.
The issue of income inequality in the 1980s and 1990s had to do with the widening discrepancy between the educated and skilled labor and the unskilled labor, where the educated and skilled labor commanded a growing salary and a premium over the unskilled labor due to the global trade that demanded more skill-intensive goods. This premium had grown over those decades but stopped growing in the last decade. This implies that education has stopped commanding a premium.
More recently, the issue of income inequality has taken a different meaning and importance. It now has to do with capital gaining more share of the national income than labor. This means returns to capital have been growing at the expense of returns to labor. The presence of excess profits in an economy that borders economic slump can be viewed within this new phenomenon.
The recent issue has started to intrigue economists and some policymakers. The literature on this issue is now investigating the reasons behind it. Several reasons have been fielded to explain the changing roles of education and capital.
The first reason is known as the robot (technology) theory, where robots are replacing labor in producing both the goods (including other robots) and the services, thus adding more profits and returns to capital at the expense of labor. In fact, there are people who think a fourth industrial revolution will come after the first one, which was based on steam and railroads; the second one, which was based on automobiles, and the third one, which is based on computers, phones and the Internet.
The second reason is the market or monopoly power theory, which gives larger companies more power over the prices of their goods and services. When this monopoly power is combined with the technology or robots, it gives corporations significantly more bargaining power over labor. In an environment full of capital-intensive technology and monopoly power, corporations will be able to hike output prices and keep input prices low, which results in excessive profits and higher returns to capital at the expense of labor.
The weakening of the labor unions and the emergence of the right-to-work policy are increasing competition in the labor markets, also leading to lower wages. The right-to-work policy in some states is now creating tensions in American society and politics, making more Americans characterize themselves as victims of corporate greed. It will also lead to shifts in the political landscape that would favor Democrats over Republicans, as happened in the recent election.
Some companies ask their workers to put nine or 10 hours of work per day for eight hours of pay without any changes in compensation. Workers would end up working 50-60 hours a week for a salary specified for 40 hours a week. The surplus will be excess profits and greater returns to capital.
The tax system favors capital over labor. Taxes on dividends are about half of the taxes on labor. This means that owners of capital get to retain more of their earnings than workers.
Some blame the minimum wage for the declining share of labor and for the slow growth in the economy. The minimum wage is $15 per hour in Australia and Switzerland in international currency, $16 in New Zealand, $19 in the Netherlands and $22 in the United Kingdom, while it is $7.25 an hour in the United States. There are those who ask for higher minimum wages to increase the spending power of the workers to achieve higher economic growth.
This new income inequality between capital and labor has worse implications for the United States than the inequality between skilled and unskilled labor. The grave implications are not only economic but also social and political. Any reforms of the tax code, changes in the minimum wage and labor laws, negligence of antitrust laws, and a shift toward the right-to-work policy should impact the future of the U.S. economy and society. The expected fourth revolution, which is based on robots, should command more attention.
Shawkat Hammoudeh is a professor of economics at Drexel University. He can be reached at email@example.com.