Why improving living standards can stimulate growth

One of the key challenges to be discussed at the World Economic Forum’s Annual Meeting in Davos is “Stimulating growth to improve living standards”. The words are right, but not always in that order. Better living standards will also drive growth – not just the other way around.

The relationship between growth and rising living standards is symbiotic, especially if we mean a reasonably equitable improvement in living standards and well-being for all. Improving living standards should be the goal of any decent economic policy.

First, growth alone does not necessarily improve living standards. Instead, measures such as redistribution and better working conditions are also essential. Recent work by the OECD found that improving working conditions by, among other measures, making jobs more secure and reducing tensions between workers and management improves the well-being of workers by the equivalent of a quarter of national income.

Second, traditional models of growth don't guarantee improvements in living standards for all (or indeed the majority). It is often claimed that wage increases depend on higher productivity – but OECD statistics show that wage rises have lagged behind mounting productivity for decades. While labour productivity increased by roughly 28% over the last two decades, real median wages across the OECD only increased by 8%, with the difference going to profits and top wage earners.

The high and rising levels of inequality are evidence that relying on traditional models of growth alone to benefit society as a whole does not work. The graph below shows that inequality within countries has grown dramatically since 1980, and has now exceeded the level of inequality in the 1920s. It is not just that trickle-down economics do not work, but that they have manifestly failed to work over the last 40 years.

The World Inequality Report 2022 shows that “The richest 10% of the global population currently takes 52% of global income, whereas the poorest half of the population earns 8.5% of it.” The graph below shows that the 10% richest have far more wealth than the bottom 50% in Europe, Asia, Africa and North and South America.

Forbes reports that “A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year” and went on to reveal that 29% of respondents of a Forbes survey reported that their income does not cover their standard expenses.

Trade unions are not against growth. Rather, unions want a flourishing economy to create jobs, pay better wages and deliver better working conditions. We simply believe that the benefits of that growth need to be shared fairly, with wealth flowing into public services, decent housing, quality education and access to reliable healthcare. These are are crucial for a productive labour force.

Fairer taxation is one important starting point. Effective taxation of the personal wealth of the very rich needs to be improved through ending tax avoidance, as does corporate taxation through the introduction of a global minimum tax rate. A Financial Transaction Tax is long overdue. The recent G20 Summit agreed “to engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed”.

Wage increases need to keep pace with increases in productivity. The balance of bargaining power between trade unions and employers has tilted far too far in favour of the latter, and needs rebalancing. Trade union density and collective bargaining coverage has shrunk by a fourth on average across OECD countries, from 45% in 1985 to 32% in 2017.

The EU’s Minimum Wage Directive makes it a legal obligation on Member States to devise an action plan if collective bargaining coverage is below 80%. The European Trade Union Institute says that action is needed in two areas: first to strengthen unions’ and employers’ organizations’ capacity to act, and the second to strengthen institutional support for collective bargaining.

Commenting on how to tackle labour market shortages in its latest Economic Outlook, the OECD writes “Reducing firms’ monopsony power in the labour market would strengthen workers’ bargaining power, leading to higher wages. The negative impact of labour market concentration on wages has been found to be smaller when trade unions are stronger (Araki et al., 2022). Reducing monopsony power can also help improve job quality.” Put simply, employers’ power to set wages is keeping down wages and workers’ bargaining power needs to be increased to deliver higher wages.

Improving living standards through fairer and more progressive taxation and wage rises will literally be investing in people, generate a new source of growth and help rebuild trust.