Wage and Fiscal Policies for Economic Recovery Jomo Kwame Sundaram and Anis Chowdhury

The new US census data released in late September show that 3.5 million people in the US climbed out of poverty, as the tepid economic recovery continues. Employers are finally creating more jobs and paying higher wages than seven years after the Great Recession started following the 2008 financial crisis.

This progress, while modest, debunks the claims of those who predicted a dire outcome following the increase in the legislated US minimum wage, especially without a robust recovery. The data show large employment and wage gains, particularly for the lower end of the jobs spectrum.

Raising the legal minimum-wage and other government programmes, such as social security, earned-income tax credit, and food stamps, have not only kept tens of millions from sinking into poverty. They also aided economic recovery by supporting household expenditure, and hence, aggregate demand, enabling a 1.2 percentage point decline in the poverty rate, the largest annual drop since 1999.

Every major demographic group benefited from the stronger economy and an expanding job market. Furthermore, wage increases were stronger at the bottom than in the middle. The poverty rate fell in 23 states, and stayed flat in the rest, not getting worse in any.

So, what is the lesson? Addressing poverty, inequality, and economic recession needs progressive counter-cyclical macroeconomic policies, with wage and social protection programmes.

Low growth trap
Meanwhile, the recent OECD Interim Economic Outlook worries that the world economy remains stuck in a low-growth trap, with poor growth expectations depressing trade, investment, productivity, and wages. It estimates that the “potential” growth rate per person for its 35 member countries has halved to one percent a year. It also warns that “exceptionally low and negative interest rates” are distorting financial markets – including share and housing price bubbles – and creating risks of future crises.

Hence, the OECD recommends switching the current policy stance from its sole dependence on expansionary monetary policy to fiscal stimulus. It also recognizes that fiscal stimuli always work better when countries act in concert, rather than in a ‘beggar thy neighbour’ fashion.

This has long been the message from the United Nations since the crisis began, especially after G20 countries prematurely switched to fiscal consolidation following the 2010 Toronto Summit. The UN also consistently argued that fiscal and structural measures are needed to boost demand and raise productive capacity.

Ensuring growth is likely to reduce the debt-to-GDP ratio in the short term, by adding more to nominal GDP than to public debt. Thus, when fiscal measures raise output, a temporary debt-financed expansion need not increase debt ratios in the longer term.

UN tax and spending policy advice favours more growth by improving infrastructure spending, social protection, and progressive tax incidence. Better labour market programmes benefit both short-term demand, longer-term supply and inclusive growth.

Malaysia’s minimum wage policy
Khazanah Research Institute’s recent second State of Malaysian Households report, based on the 2014 Household Expenditure Survey by the Department of Statistics, suggests a significant increase in household income of the ‘bottom 40%’ from RM1761 in 2012 to RM2296 in 2014!

While partly attributable to higher commodity prices before the commodity price slump from late 2014, this impressive increase was probably also due to implementation of the 2012 minimum wage law from 2013.

The minimum wage law had long been sought by the labour movement and opposition political parties. Nevertheless, it continues to be opposed by some employers, especially in the plantation sector, and those of ‘neo-liberal’ economic persuasion as ‘populist’. Some of these critics claim, without supporting evidence, but by citing others of similar ideological persuasion, that such labour market distortions will result in greater unemployment and dissuade productivity growth.

In fact, the continued availability of immigrant workers prepared to work for lower wages has delayed the introduction of labour saving innovations which would increase labour productivity. Malaysia has to come to terms with its immigrant labour policy as it threatens economic progress and worker welfare.

By subjecting foreign workers to poor working conditions, Malaysians depress the welfare of all. By understating their numbers and contribution of 30-40 percent of the labour force, economic performance seems more impressive than is actually the case. This is especially so in the most dangerous, dirtiest and depressed jobs, weakening efforts to ensure ‘decent work’ for all.

Although Malaysia remains a very open economy, better working conditions will go a long way towards boosting aggregate demand. Lower income households are much more likely to spend most, if not all their additional income. In turn, their spending is more likely to be on goods and services produced within the national economy.

Thus, high commodity prices until 2014 and enforcement of the 2012 minimum wage law have helped economic recovery. But with the collapse of commodity prices and fiscal spending since, prospects for the economy are poorer.

An election budget may help improve public sentiment, but is unlikely to help address fundamental underlying problems, not least because so much will be siphoned off by political rentiers, ostensibly for campaign finance.

(This article was originally published in Inter Press service (IPS) news on October 5, 2016)