At first glance, it would seem this year’s Davos summit will be off to an auspicious start, with news that the global economy is recovering faster than anticipated.
Yet a closer look at the global situation reveals a potentially dangerous gap between profits and people.
Corporate profits are up and global equity markets are looking forward to another year of plenty, while at the same time unemployment and household incomes stand still.
The Global Employment Trends 2014, shows clearly that the modest economic recovery has not translated into an improvement in the labour market in most countries.
Businesses have been sitting on cash or buying back their own stocks, rather than investing in productive capacity and job creation. In part, this is a result of continued weakness in aggregate demand, both at national and global levels. It is compounded by uncertainty about where new sources of demand will come from and uncertainty about public policies, for example on financial sector reform.
The increased flow of profits and liquidity into asset markets rather than the real economy not only increases the risk of stock and housing price bubbles, but also damages long-term employment prospects.
In developing countries, informal employment remains widespread, and the pace of improvements in job quality is slowing down. That means fewer people are moving out of working poverty.
Add to that the fact that in most countries, workers have been getting a smaller share of national income and of gains in productivity, while more of the income is going into profit, and we have a major problem.
Inequality is reflected in the depressed incomes of most households and therefore constrains consumption growth, which in turn reduces economic growth. It also causes public frustration, raising the risk of instability – the current unrest in many countries is fuelled by perceptions of unfairness.
US President Barrack Obama recognized this when he recently called inequality “the defining challenge of our time.”
Boosting demand for goods and services would go a long way towards creating the incentive required for companies to expand and create jobs. And that entails moving away from the aggressive fiscal consolidation pursued in many countries. It also means addressing the declining share of economic growth going to workers, stagnant wages and high unemployment that have kept household spending down.
Increased wages lead to increased demand, so a key part of the solution is to set appropriate minimum wages and to have policies that reinforce the links between productivity and wages. Indeed, President Obama has called for raising the minimum wage and a similar proposal is hotly debated in Britain, while the new German government has agreed to create a national minimum wage for the first time.
We need to focus on the productive economy, and make a firm commitment to investing in people, skills and jobs, and reducing economic disparity.
If we fail to act, if we fail to tackle the youth jobs crisis, long-term unemployment, high drop-out rates and other pressing labour market issues, we will be destroying hopes for sustainable growth – and sowing the seeds of further, and perhaps deeper social unrest.