Growing inequalities

Policy makers must themselves stand on solid moral ground to be able to temper the excesses of the ‘invisible hand’ which keeps pushing up top executives’ pay while pressing down that of workers generally

Economic theory postulates that when income and wealth are more evenly distributed in society, the spending that takes place out of it helps the economy grow much more than if income and wealth were concentrated in few hands. The reason for this situation is that the few who have too much of both will not spend – because their demand reaches a point of saturation – as much as if the same wealth and income were spread out more evenly among a larger number of people.

Yet, the tendency the world over has been to concentrate more income and wealth in fewer super-rich hands. That has been happening when economic growth was strong and even after 2008 when it has weakened.

Unequal distribution of incomes and wealth is used by politicians to campaign in favour of those who are jobless and of others underpaid. The lot of under-paid and mistreated workers spearheaded not only emancipation of the working class in Mauritius. It also eventually flowered into a mass protest against the unfairness of the system, ending up with the country’s independence. Since then, successive political campaigns have thrived on promises to reduce unemployment and improve the lots of workers.

According to trade unions in Mauritius, workers at the lowest rung of the economic ladder currently face continuing impoverishment as prices of basic goods and services keep going up while workers’ pay at the bottom are singularly low. It is the reason why the unions have asked for a minimum wage system to be put in place. The government wishes to proceed cautiously in the matter. It decided to establish a National Wage Consultative Council with the objective of thrashing out the issue and coming up with recommendations.

On the other hand, economic theory of the free market considers that there is an ‘invisible hand’ of the market which eventually brings about an equilibrium wage rate for workers, on consideration of the forces of supply and demand. If supply of workers is greater than the demand by employers, the wage rate will tend to decline. Conversely. A persistent rate of unemployment at around 8% of the workforce in the country suggests that there is a pressure for wage rates to go down in segments where there is an oversupply.

We’ve seen that it is workers at middle management and lower levels who have lost their jobs or seen their pay compressed whenever an economic crisis has struck at the economy-wide level or at the single enterprise level. This phenomenon has repeated itself time and again in the course of history in advanced and less advanced countries. Thus, it may be said that the ‘invisible hand’ nearly always adjusts to the disadvantage of this class of workers.

Not only are our trade unions asking the institution of a minimum wage system to guard against the threat posed by the ‘invisible hand’ of the market. There are strong voices in other places as well to guard against the shift of the burden of economic adjustment to the working class. In our case, the IMF/World Bank recently drew attention to a possible shrinking of the middle class. It’s a phenomenon spreading out across different parts of the world and there’s not much protection governments are providing against it.

The streets of Paris are in turmoil with trade unions staging protests against a socialist French government keen to introduce “flexibility” in labour laws, which the unions consider as fatal to the working class. They don’t see eye to eye with the government on the underlying ‘hire-and-fire’ rules embedded in the new laws. In other words, they challenge the strengthening of the ‘invisible hand’ contemplated in these laws. The government, on its part, thinks that this will unlock potential for creating more employment.

Similarly, one cornerstone of the referendum decision of June 23rd in the UK was the impact of immigration towards keeping a lid on local wages and the threat it posed to keep local workers out of jobs. In America, Donald Trump, the Republican candidate for the 2016 presidential elections has gained support by promising to keep Latin American workers out.

The struggle for decent wages and keeping up jobs concerns this middle and lower level of the workforce across different parts of the world. Mauritius is thus not an exception. People at this level are feeling increasingly vulnerable to the working of the ‘invisible hand’ of markets.

Not strangely, however, this is not the lot of executives of enterprises. It is well known that economic prosperity of the past decades has added to the incomes and wealth of the limited club of the world’s super-rich, in developing as in developed countries. Both income and wealth have become skewed in favour of these few. What is amazing is the extremely widening gap caused by the acceleration of income differentials in favour of firms’ top executives against the take-home pay of workers lower down.

In the 1980s, Peter Drucker, a management guru, warned that it would not be good for the morale of workers if the ratio of the pay of executives to the average worker were to go higher than 20 to one, when it was threatening to be hiked up to 40 to one economy-wide in America. Heedless, top executive pay kept increasing in good times and bad, with the ratio currently possibly hitting as much as 335 to one. It is not clear the extent to which this selective escalation and inflation of earnings of the few at the top will be carried on and how it will affect the working of individual economies.

This situation has arisen because of a complicity between a limited pool of “talented” executives on the market and shareholders of companies always prepared to hike up whatever exaggerated earnings top executives were already drawing in their present firms, to poach them away to their enterprises in order to give a boost to their own share prices.

As the economic crisis of 2008 showed, it was a misplaced emphasis on the short term. Of what avail is it for executives to trigger accelerated sales of emissions-cheating Volkswagen cars in the short run, not considering the subsequent enormous cost of recalls, the huge fines for cheating and the lost reputation?

Be it as it may, the disparity of pay between the top crust and the other workers has kept increasing without regard for the long term viability of the enterprises. The culture of big pay for the big bosses has crossed countries’ boundaries, spreading the contagion to countries such as Mauritius.

The malady has spread not only into private enterprises; it has even visited enterprises in which the state has an interest. Exaggerated pay of the few at the top, unsupported by long term positive outcomes, comes at the cost of workers lower down and of consumers eventually. This model may be ill-adapted and unsustainable for an economic environment such as ours. Policy makers must themselves stand on solid moral ground to be able to temper the excesses of the ‘invisible hand’ which keeps pushing up top executives’ pay while pressing down that of workers generally.

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When excessive income and wealth feed on each other

When incomes are exaggerated in the beginning for certain individuals, the latter end up accumulating it in the form of wealth (unspent incomes). This wealth becomes the launching pad for securing “commanding heights” in the economy: it is used to set up enterprises which, in turn, generate more incomes and wealth. If the wealth owner is also the CEO of companies he sets up, the Boards will be compliant with his wishes to grant him much bigger pay than what will be paid to other executives — apart from dividends he also receives as a shareholder. In this way, new rounds of wealth and incomes are successively put in motion in favour of the owners of capital.

Thomas Picketty, French economist who works on wealth and income inequality, has in his book ‘Capital in the 21st Century’ established with reference to facts and figures pertaining to several countries that the restricted numbers of owners of capital in the economies have kept extracting higher and higher returns in capitalist countries, in fact at rates higher than the rate of growth of GDP in the individual countries. This, he believes, has led to a disconnect whereby the rich get richer while economies on the whole falter due to the uneven distribution of incomes and wealth. No one has disproved his findings so far.

* Published in print edition on 8 July 2016