It’s time for redistribution of wealth

Over the past few days, policymakers have embraced redistribution of wealth as a top priority :

-          Yesterday, the new Japanese Prime Minister, Fumio Kishida, promised he will prioritize boosting wages through tax incentives, rather than imposing higher levies on capital gains and dividends. This is still unclear. But it seems companies which will increase salaries will be able to benefit from some kind of tax exemptions. He has also unveiled a specific plan to introduce pay hikes for nurses, care workers and childcare workers who are « underpaid for the amount of work they do ». This new policy priority aims to promote a « new Japanese-style capitalism ». It also aims to revert the negative effects of the structural reforms introduced in the early 2000s under the government of Junichiro Koizumi. These reforms, especially higher reliance on market mechanisms (minkatsu, in Japanese), reinforced the country’s competitiveness but widened the income gap too.

-          In the United Kingdom, the Prime Minister Boris Johnson declared his government plans to build a « high-skill, high-wage » economy across the country. This won’t be easy. It will require a major shift in the way British businesses work. Many sectors will need to reduce their reliance on cheap foreign labor, especially in health and services.

-          In France, the candidate of the Socialist Party for the 2022 April presidential election, Anne Hidalgo, proposed to boost the minimum wage by 10 to 15%. On 1 October, it increased by 2.2%. The gross minimum wage currently stands at 1 554.58€. It would be between 1710,03€ and 1787,76€ if Hidalgo’s measure is enacted. However, she has not explained how the increase would be financed and whether it would be part of negotiations between the government, the business representatives and the trade unions. Such an increase would theoretically require a large political consensus – which is not the case yet. At the beginning of September, she proposed to double the salaries of teachers, which are among the lowest in the European Union, notably at the start of their career.

-          In Germany, the public sector trade unions ask for a 5% pay rise. Last time, it ended in a 3.2% increase spread over nearly three years. But inflation was much lower than now. It is hovering at the highest level since 1992, at 4.1% YoY in September. Expect salary rises to become a broader political topic and to be fully part of the ongoing coalition government negotiations between the center-left SPD, the Greens and the pro-business FDP.

Calls for redistribution of wealth are not surprising, in our view. After every single economic crisis, inequalities tend to be on the rise. In June 2020, the Harvard economist Ian Kumekawa wrote an opinion paper in the Financial Times to revisit the idea of Pigou wealth tax. After the First World War, the British economist Arthur Victoria Cecil Pigou Pigou called for a huge, one-time levy of 25% on all wealth, exempting the poor, to pay for a skyrocketing wartime bill. At that time, it was also considered as a way for the very affluent to share more equitably the burden of the unexpected crisis. The Pigou wealth tax was not introduced. Nowadays, there is not enough political and public support to introduce it either.

Actually, governments are acting the other way around. Perhaps, they will raise taxation for the wealthiest. But their core idea is to find ways to increase redistribution of wealth and especially salaries. Over the past two decades, real wage increases have been lagging behind labor productivity growth (calculated as follows : GDP/worker worked) in almost all the developed countries. According to the AMECO database of the European Union, labor productivity increases were four times higher than increase in real compensation in the EU28 between 2000 and 2016. There are major disparities between member countries, sometimes. Labor productivity increased three times more than wages in Germany and Croatia, and two times more in Poland and Austria over the period, for instance. In Hungary, Romania and Greece (for obvious reasons), real compensation decreased while real labor productivity increased (see below chart). Rebalancing is needed.