A better deal for the world's workers

The last four decades of globalisation and technological innovation have been a boon for those with the skills, wealth, and connections to take advantage of new markets and opportunities. But ordinary workers have had much less to cheer about.

In advanced economies, earnings for those with less education often stagnated despite gains in overall labour productivity. 

Since 1979, for example, US production workers' compensation has risen by less than a third of the rate of productivity growth. Labour-market insecurity and inequality rose, and many communities were left behind as factories closed and jobs migrated elsewhere.

In developing countries, where standard economic theory predicted that workers would be the main beneficiary of the expanding global division of labour, corporations and capital again reaped the biggest gains. 

A forthcoming book by George Washington University's Adam Dean shows that even where democratic governments prevailed, trade liberalisation went hand in hand with repression of labour rights.

Labour-market ills create broader social and political strains. In his pathbreaking 1996 book "When Work Disappears", the sociologist William Julius Wilson described how the decline in blue-collar jobs had fueled an increase in family breakdown, drug abuse, and crime. 

More recently, the economists Anne Case and Angus Deaton have documented the rise in "deaths of despair" among less-educated American men. And a growing empirical literature has linked the rise of authoritarian, right-wing populism in advanced economies to the disappearance of good jobs for ordinary workers.

As a result of the global Covid-19 pandemic, labour problems are receiving renewed attention – and rightly so. But how can workers not only get their fair share but also have access to decent jobs that enable meaningful lives?

One approach is to rely on the enlightened self-interest of large corporations. Happy, fulfilled workers are more productive, less likely to quit, and more likely to provide good customer service. 

MIT's Zeynep Ton has shown that retail establishments can cut costs and boost profits by paying good wages, investing in their workers, and responding to employees' needs.

In advanced economies, earnings for those with less education often stagnated despite gains in overall labour productivity. Photo: Bloomberg

But many firms that claim to take the high road in labour standards are also vehemently anti-union; taking the low road by minimising workers' pay and say is too often a profitable corporate strategy. 

Historically, it is the countervailing power of labour – through collective action and union organisation – that has brought about the most significant gains for workers.

So, a second strategy to help workers consists of increasing the organisational power of labour vis-à-vis employers. US President Joe Biden has explicitly endorsed this approach, arguing that the shrinking of the American middle class is a consequence of the decline in union power, and has vowed to strengthen organised labour and collective bargaining.

In countries such as the United States, where unions have become significantly weaker, this strategy is indispensable to redress imbalances in bargaining power. 

But experience in many European countries, where labour organisation and collective bargaining remain strong, suggests that it may not be the full remedy.

The trouble is that strong worker rights can also create dualistic labour markets, where the benefits accrue to "insiders" while many less experienced workers struggle to find jobs. 

Extensive collective bargaining and robust labour regulations have generally served French workers well. But France has one of the highest youth unemployment rates among advanced economies.

A third strategy, which aims to minimise unemployment, is to ensure adequate labour demand through expansionary macroeconomic policies. When fiscal policy keeps aggregate demand high, employers chase workers – rather than the other way around – and unemployment can remain low. 

Research by Larry Mishel and Josh Bivens of the Economic Policy Institute shows that macroeconomic austerity is a major reason why US wages have lagged behind productivity since the 1980s.

By contrast, the Biden administration's aggressive fiscal response to the Covid-19 crisis has ensured that US wages have increased amid a sharp fall in unemployment.

But although tight labour markets can help workers, they can also pose an inflation risk. Moreover, macroeconomic policy cannot target the lowest-skilled workers or the regions where jobs are most needed.

A fourth strategy, then, is to shift the structure of demand in the economy in order to benefit less-educated workers and depressed regions in particular. 

The shortage of secure, middle-class jobs is closely linked to the disappearance – as a result of globalisation and technological change – of blue-collar manufacturing work and service-sector sales and clerical jobs. 

Policymakers must focus on expanding the supply of jobs in the middle of the skill distribution in order to reverse these polarising effects.

This entails revising existing industrial and business-development programs so that incentives go to the firms most likely to generate decent jobs in the right places and are designed with these firms' needs in mind. Conventional industrial policies that target skill- and capital-intensive manufacturing, and rely heavily on tax breaks, will not do much to spur the expansion of good jobs for those who most need them.

In addition, we must explicitly consider how new technologies help or hurt workers, and rethink national innovation policies. The current narrative focuses almost exclusively on how workers should retrain to adapt to new technologies, and too little on how innovation should adapt to the workforce's skills.

As economists such as Daron Acemoglu, Joseph E. Stiglitz, and Anton Korinek have pointed out, the direction of technological change is flexible and depends on price incentives, taxes, and the norms prevailing among innovators. 

Government policies can help guide automation and artificial-intelligence technologies along a more labour-friendly path that complements workers' skills instead of replacing them. 

My Harvard colleague Stefanie Stantcheva and I discussed some preliminary ideas in a report we prepared for French President Emmanuel Macron.

Ultimately, boosting labour earnings and the dignity of work requires both strengthening workers' bargaining power and increasing the supply of good jobs. That would give all workers a better deal and a fair share of future prosperity.

Dani Rodrik, Professor of International Political Economy at Harvard University's John F. Kennedy School of Government, is the President of the International Economic Association.

Disclaimer: This article first appeared on Project Syndicate and has been published by a special syndication arrangement.