The Business Case for Fighting Growing Inequality

My Comments: I consider income inequality the greatest existential threat to our democracy. It manifests itself as a shrinking middle class in these United States.

It has the potential to erode what we think of as rational and peaceful co-existence among nations globally. It’s what continues to drive the tensions and conflict in the Middle East where income inequality overwhelms the average young person and their hopes for the future.

This article explains why it’s also bad for business and how business would be well served to address this growing problem. It serves no purpose to build a business empire if what you sell is not affordable.

Guy Miller, Zurich Insurance, June 30, 2017

Despite the current recovery, the global economic outlook remains beset by structural issues as the fallout of the financial crisis continues to be felt a decade later. As policymakers search for solutions, social unrest and the resurgence in populism have focused attention on how economic gains are distributed. International institutions are urging governments to target more inclusive and sustainable growth.

Global concern about economic risks is underlined by the interconnections with other risks: unemployment increases pressure on state social protection systems, for example, while inequality feeds political polarization. Many economic problems undermine social cohesion. In doing so, they also contribute to conditions that are bad for future economic prospects. Business leaders should recognise that these are issues for them, as well as for politicians and economists. Spending power is squeezed, while wasted potential dampens productivity and innovation.

The UN Sustainable Development Goals include “decent work for all”. But the latest Economic Outlook of the Organisation for Economic Cooperation and Development (OECD) shows this remains a distant ambition. While global employment indicators are improving, productivity and wage growth “remain subdued”. The report upgrades the global growth forecast for 2017 from 3.3 percent to 3.5 percent but attributes this to modest cyclical expansion.

In January, the International Labour Organization’s (ILO) World Employment and Social Outlook forecast that 3.4 million more people would find themselves unemployed this year (a rise from 5.7 percent to 5.8 percent). With the rapid global growth in people looking for work, the number in vulnerable jobs is expected to rise by 11 million. Policymakers clearly have their work cut out. But as the private sector looks to mitigate economic risks, it should also play its part in creating inclusive 21st Century growth models.

Profit Sharing and Productivity

According to the OECD, the gap between rich and poor in OECD countries is the highest for 30 years and continues to grow. Changing this trend will require more equitable profit sharing. The OECD says labor’s share of income declined from 66 percent to under 62 percent in advanced economies between 1990 and 2009.

Guy Miller, Chief Market Strategist & Head of Macroeconomics, Zurich Insurance Group, said today’s high capital share may be linked to underinvestment in training and measures to improve productivity. Governments could use taxation initiatives or partnerships to encourage private investment in these areas that would also benefit the macro economy, he added.

The slowdown in productivity growth has spread to emerging markets after affecting 90 percent of OECD countries this century. Hopes that the Fourth Industrial Revolution will raise productivity have not been realised so far. Instead, technological change and the growing capture of rents by frontier firms are causing some regions in developed nations to be left behind. Christian Kastrop, Director of the Policy Studies Branch at the OECD Economics Department, said while automation will cause job losses, it could also create new jobs. “Reskilling or upskilling must become normal, so people feel included even if they lose their jobs,” he said. “Governments must take action with concrete interaction with civil society, and fostering good working relationships between business and trade unions is imperative.”

The Labor Force Learning Imperative

As growth is increasingly driven by automation and the knowledge economy, workforces will need to become more dynamic and flexible. Automation is now a threat not only to low-skilled workers but also to “mid-tier and even higher-tiered knowledge workers”, said Mr Miller. Economies need a new emphasis on life-long learning if they are to adjust.

Automation’s potential impact on unemployment, along with structural changes like the rise of the sharing economy, should focus policymakers’ minds. Employers must also recognise how funding training is likely to reap rewards in time. “A sense of learning how to learn must be more deeply embedded in our culture and throughout the career cycle,” said Steven Tobin, Team Leader of the ILO’s Labour Market Trends and Policy Evaluation Unit.

Skills mismatch is already a persistent problem in many countries. When workers lack the skills the market demands, it is a “lose-lose-lose” situation, said Steven Kapsos, Head of the ILO’s Data Production and Analysis Unit. “Workers are less productive, firms less profitable, and overall economic growth suffers,” he said. Policies that promote economic activity among women and older workers would stimulate growth in countries with ageing populations, he argued.

Closer collaboration between the public and private sectors on training and active labor market programs is vital, said Mr Tobin. “Far too often, public sector training and skills programs have been designed without consulting social partners, notably the private sector.”

The Cost of ‘Quarterly Capitalism’

Daryl Brewster is CEO of U.S.-based CECP, a CEO-led coalition of more than 200 major companies, founded “to create a better world through business”. Its members represent USD 7 trillion in revenues and USD 18.6 billion in societal investment. But Mr Brewster said 86 percent of the coalition’s CEOs feel they are too focused on what he calls “quarterly capitalism”. McKinsey Global Institute’s Corporate Horizon Index shows that companies with long-term approaches outperform peers. And CECP has launched its own initiative to enable CEOs to present long-term plans to long-term investors.

“We think it could help change the narrative from a slash and burn approach to one of building sustainable societies,” said Mr Brewster. “By taking a longer term horizon with regular updates, companies will attract better employees, enjoy more stable societal situations, and have more customers who can afford their products.”

Balancing Fiscal and Monetary Policy

A low interest rate, low yield environment has become the norm for many economies that have become reliant on central banks for economic stimulus. But mixed results have led to an increasing number of dissenting voices. The ILO argues that coordinated fiscal stimulus could “jump-start” the global economy. In doing so, it could cut unemployment and raise investment demand.

Zurich’s Mr Miller said monetary policy has disproportionately favoured the asset rich. Greater efforts are needed to show where fiscal spending is most likely to deliver high multiplier effects and long-term impact, he added. “It‘s important that when the next downturn emerges, a combination of both fiscal and monetary tools are used, ideally in a coordinated manner across regions,” Mr Miller said. He also suggested that “temporary fiscal transfers between debtor and creditor nations” should be considered in the Eurozone. Mr Kastrop said the Eurozone is an exception to the need to end reliance on monetary policy, since a change might favor Germany over weaker nations.

An Era of Equitable Growth?

The global economy may be experiencing a cyclical upturn. But the OECD says it is not “good enough to sustainably improve citizens’ well-being”. Achieving that will require concerted actions by policymakers, while Mr Brewster is also clear about the role business can play.

He said the recent socio-political climate should be a “wake-up call” for business, adding “Having more of the world participating in the economy rather than fighting against it is in companies’ best interests.”

This is true because it is often impossible to separate economic risks from social and political risks. If people feel the economy no longer offers them a fair chance, these feelings will soon come to the surface in other areas. Getting closer to the UN goal of decent work for all would surely lower the rising risk of political polarization. It would also favour international cooperation over a return to protectionism.

What is at stake goes far beyond stimulating short-term growth or meeting the next performance targets. The current recovery, combined with changes in corporate culture, offer a window of opportunity for reforms that could enable an era of more equitable growth. Both policymakers and business leaders must recognise that they have a clear interest in creating stronger economies for all.

Key takeaways

• While automation is nothing new, the pace and breadth of current change is striking. It is no longer just the low-skilled that are at risk from automation, but also many mid-tier and even high-tiered knowledge workers.

• Having a flexible workforce and one that is trained in the latest thinking and techniques can create a dynamic and proactive culture that is more suited to a changing competitive landscape. This means investing in people as well as in capital.

• Life-long learning will be vital in the digital age and the public sector must therefore consult more closely with the private sector, especially in relation to the skills companies want.

• Businesses that target long-term performance and help drive inclusive economic growth can boost their bottom line as well as social cohesion.