[Economics] How the Concentration of Capital is minimizing the Wage Level 2019-09-07

There are increasing reports of a recession in the German economy. [3] [4] [5] [6] [7] What is striking however is how little is reported in this context about the impact of domestic demand and the wage share. On the one hand wages and consequently the wage share are comparatively low in Germany. [10] [11] And that is why Germany has now an above-average export ratio of 39% dependent on exports. [8] [9]

1. The Wage Share
2. The Consequences
3. Solutions

The Wage Share

The wage rate is the share of the employees' income from the entire disposable income in an economy. However the lower the wage share the more domestic demand will fall. This is also because with rising incomes people start to save and with decreasing income people are less able to save.

However the wage share changes with wage development and labor productivity. Labor productivity is the amount of goods or services that comes from a given amount of labor input. An increase in labor productivity is therefore positive and means that more goods and services are created with equal labor input. However in order to be able to consume the additional goods and services wages in the same country must increase accordingly.

Dominic Ponattu, Andreas Sachs, Heidrun Weinelt and Alexander Sieling have recently examined how the concentration of capital is minimizing the wage level. It compared wage developments from 2008 to 2016 as a function of company concentration. The result is that employees have escaped wage increases totaling 9 to 11 billion euros or depending on the industry up to 2,192 Euros less per employee over this period. A precise definition does not exist for companies that are responsible for this wage restraint. But they are particularly large and particularly influential in their branch. [1] [1,p.10] [2]

However it is striking that these companies offer relatively few employees as a result of digital distribution channels. In addition these companies are characterized by a particularly low wage increases. And the combination of both then puts competing companies under pressure to technically keep up or save on wages. Public services such as healthcare, waste management or water supply are the areas most affected by this dynamic. Also affected are the logistics, legal and wholesale sectors. [1] [1,p.10] [1,p.25] [2]

The Consequences

Added to this is the wage moderation following the introduction of the euro in Germany. And in total the wage level in Germany is below that of its neighbors Luxembourg, France, Ireland, the Netherlands and Belgium. This becomes apparent in the minimum wage of 9.19 Euros (2019) and the low quotient of wages and labor productivity (unit labor costs). [8] [9] This lack of purchasing power has severely hampered domestic demand in Germany leading to an increase in the export share from 21% in 1996 to 39% in 2017. Thus Germany's economy is enormously dependent on exports and particularly prone to international crises or a trade war. [10] [11]

Over the past two decades the share among working poor for ordinary workers in Germany has risen sharply. The proportion of those at risk of poverty in Germany rose from 12.7% in 2007 to 20.5% in 2016. According to the EU criteria one is endangered to poverty if one has less than 60% of the total income of the total population. [12]

The proportion of people affected by poverty in Germany despite being employed has also increased since the introduction of the Euro and low-wage policies. According to the EVS (Einkommens- und Verbrauchsstichprobe/Income and Expenditure Survey) and the SOEP (Sozio-ökonomisches Panel/Socio-Economic Panel) the proportion of people affected by poverty despite gainful employment in Germany rose from around 5% in 1995 to 10% in 2015. [13] [13,A03]

Solutions

However the study by Ponattu, Sachs, Weinelt and Sieling also suggests possible solutions. The decline in the wage share could on the one hand be offset by a new asset policy through corporate taxes or equity interests. Alternatively smaller and medium-sized enterprises could also be strengthened in their competitiveness. One possibility would be if the research and development of the companies concerned were promoted by the state. In any case, the influence of these above-average companies should not be underestimated, especially on the wage share. With their dominance these larger than average companies could cause significant harm to other workers and companies in their industry. [2]

[1] Löhne wachsen langsamer, wenn Unternehmen mächtiger werden 2018-11-12
https://www.bertelsmann-stiftung.de/de/themen/aktuelle-meldungen/2018/november/loehne-wachsen-langsamer-wenn-unternehmen-maechtiger-werden/
https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/Studie_BST_PIW01_07lay_RB.pdf
[2] MARKTKONZENTRATION - Die Superstar-Firmen kommen! 2018-11-15
https://makronom.de/marktkonzentration-die-superstar-firmen-kommen-28594
[3] Economics - German Economy Heads for Worst Growth in Six Years 2019-04-17
https://www.bloomberg.com/news/articles/2019-04-17/germany-2019-economic-growth-forecast-cut-in-half-to-0-5-percent
[4] Germany's economy is flashing yet another 'grim' warning after more weak data and a slump in demand 2019-04-18
https://markets.businessinsider.com/news/stocks/german-economy-car-industry-in-crisis-after-grim-manufacturing-data-2019-4-1028121039
[5] The German economy is slowing. Brexit could make it worse 2019-01-28
https://www.aljazeera.com/news/2019/01/german-economy-slowing-brexit-worse-190128031440710.html
[6] 'This is a serious recession warning in the German economy' 2019-03-27
https://www.businessinsider.de/this-is-a-serious-recession-warning-in-the-german-economy-2019-3?r=US&IR=T
[7] Schnellschätzung des BIP und der Erwerbstätigkeit für das zweite Quartal 2019 2019-08-14
https://ec.europa.eu/eurostat/documents/2995521/10030277/2-14082019-BP-DE/0974b194-c2e5-4c99-92d1-dd373761f438
[8] NEWS - Germany minimum wage remains one of lowest in region: report 2019-02-14
https://www.dw.com/en/germany-minimum-wage-remains-one-of-lowest-in-region-report/a-47517931
[9] NOMINAL UNIT LABOUR COSTS, TOTAL ECONOMY
http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm
[10] Exportanteil/Export Share
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/LangeReihen/Aussenhandel/lrahl01.html
[11] Exportüberschuss/Export Surplus https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/VGR/Inlandsprodukt/Tabellen/BruttoinlandVierteljahresdaten_xls.html
[12] Eurostat-Daten - Wenn Arbeit nicht vor Armut schützt 2018-10-24
https://www.tagesschau.de/inland/beschaeftigte-armut-101.html
[13] Armuts- und Reichtumsbericht
https://www.armuts-und-reichtumsbericht.de/DE/Startseite/start.html