The economy is a big pie. Yum. All of us play a role in baking this pie. Some more than others, but we’re all involved in some shape or form.
Economists have held the term ‘growing the pie’ close to their hearts for the past few decades. The pie is sliced up in different ways, and some get more than others. Advocates for this arrangement believe that, provided this big pie keeps growing, everyone’s portion of pie will continue to increase.
Well, this pie has been growing. We’ve seen consistent improvements in gross domestic product and productivity, but the vast majority of us haven’t been receiving the increase in portion size that we were promised this would growth produce. Our portions have, in fact, decreased.
Income inequality is prevalent in almost every Western country – the US is a prime example. From 1948 through to 1973, the US saw productivity and average hourly worker compensation increase by roughly 96.7 percent and 91.3 percent respectively. This seems fair enough. Since then, productivity has slightly dipped to 74.4 percent between 1973 – 2013, but hourly worker compensation has struggled to keep and is currently increasing at a rate of 9.2 percent. This is significant. We’re still producing more and more at higher efficiencies, but we – or at least the majority of us – haven’t been ‘reaping the rewards’, so to speak.
Income inequality has continued to increase. Wealth begets wealth, and it’s becoming increasingly difficult to break this trend.
There are many hypotheses that attempt to account for our increasingly smaller portions. Some credit the current state of world trade in a rapidly globalising world economy. The explanation here is that hourly compensation in the West was forced down as manual labour jobs leaked out of the West and into the East – meaning the demand for skilled service-based labour spiked in turn. Those with superior educational qualifications began to command significantly higher wages while manual labourers endured major lay-offs and wage decreases.
Others believe the push towards ‘small government’ that consumed the West during the 80s and 90s is responsible. The deregulation of public infrastructure and utilities, tax cuts, and a sticky minimum wage has likely been a factor in driving inequality. The trickling we were promised never occurred, and the rich pooled their money. Collective action amongst workers was demonised in the media and by governments across the West, resulting in low union membership to industry ratios over the past 2 – 3 decades. This has affected the ability for workers to enter genuine bargaining arrangements, leading to falling wages and diminishing workers’ rights.
At the end of the day, it is difficult to pinpoint where our pie is going wrong. Whatever the reason may be, it seems obvious that our pie is quite dysfunctional. This represents the flaw in using the pie as a measure of prosperity. An economy is complex. It cannot be boiled down to a single number or statistic. Economic growth does not somehow spontaneously divide its rewards equitably across the population. One thing, however, is certainly clear: our pie needs some work.