Wage Stagnation in the Global North

Yanis Iqbal

According to the “Global Wage Report 2020-21”, in the few years before the COVID-19 crisis, annual average real wage growth for North  America (Canada and USA) and Western Europe fluctuated between 0 and around 1 per cent. What accounts for this wage stagnation over much of the Global North? To answer this question, we need to briefly look at the pre-neoliberal economy and examine how it was impacted by the advent of neoliberal organization.

Segmentation

In the period before neoliberal globalization, the world economy was deeply segmented. In this segmented arrangement, the labor reserves of the South did not restrain the rise of real wages in the North. There was consequently, a widening of inequalities between the workers of the North and the South. While tropical labor was not free to move into the temperate regions, capital from the latter was free to move into the former. Yet, despite this formal freedom, capital chose not to do so except in specific spheres like mines and plantations. To be more specific, it did not move manufacturing to the tropical regions, despite the very low wages prevailing there. 

In fact, what we witnessed was the implementation of restrictions on the bourgeoisie of the peripheral economies in setting up manufacturing units within these economies, using the same technologies as in the metropolis with locally available cheap labour, for the purpose of exports. From the absence of “infant industry” protection, to the denial of credit from a banking system controlled by metropole, to the placing of high tariffs in the metropolis on manufactured goods exports from the backward economies (restrictions that did not exist when it came to primary commodity exports), innumerable obstacles were placed in the way of the domestic bourgeoisie of the backward economies (at least in the pre-first world war period) to ensure that it could not challenge the near monopoly position of metropolitan capital in manufacturing activities. The question is: why did not capital move from the North to the South to take advantage of its low wages for producing the same goods with the same technology as used in the North?

The institutionalization of a pattern of international division of labour during the colonial period – with the metropolis producing manufactured goods and the periphery primary commodities – was done for three purposes. First, domestic de-industrialization in the colonies – the displacement of local artisan production by imported manufactured goods from the metropolis – kept the prices of primary commodities low. If the value of money falls against commodities, there is a danger that consumers will become hesitant about holding money and move towards holding commodities, thereby undermining money’s status as a store of wealth and eventually therefore its status as a circulatory medium. The entire monetary system, under capitalism, would get jeopardized by the threat of an increase in supply price of essential commodities needed for the reproduction of capital. 

Colonial powers achieved the price suppression of primary commodities by reducing their local absorption within the outlying regions through an income deflation imposed on the working people (workers, peasants, artisans, agricultural laborers) of the periphery, which squeezed their purchasing power and hence their absorption of such products. There are no appropriate alternatives to income deflation. In the case of agricultural commodities, one could ask whether land-augmenting technological change – intended to increase the output per natural unit of land – could supplant income deflation. The answer is in the negative. These initiatives not only require state intervention – thus undermining the social legitimacy of capitalism – but also raise the income of peasants, leading to an increased absorption of resources in their own countries. With the help of de-industrialization, metropolitan forces created a large reserve army of labour in the periphery; and to be cast out of work in this way is, in effect, to suffer from an income deflation, ensuring restraint on the domestic absorption in the periphery of the commodities that are sought cheaply by the metropole so as to maintain stability in the value of money.

Secondly, with the consolidation of a primarized, export-oriented commodity structure, the colonies were forced into external dependency on the Global North in the form of the necessity of imports. While the colonized countries exported primary goods like food products, lumber and minerals to the Global North, they tended to re-import manufactured products from these same countries. The value added to these manufactured commodities – typically constructed from the primary inputs imported earlier – generated huge profit for northern countries. In the late 19th century, as Britain lost its home market to emerging industrial powers, it exported large amounts of goods to its colonies so that it could increase its revenue. 

Thirdly, the primarization of colonized economies not only facilitated the absorption of British goods, but also provided the commodity form in which Britain could make its capital exports. Britain did not produce goods which were in high demand in the newly industrializing countries like the US. The demand there was substantially for raw materials, i.e. minerals and primary commodities, which were produced in the colonial possessions. However, we know that Britain became the largest capital exporter in the years before the First World War. These capital exports were made possible by the fact that Britain appropriated the vast export surplus of its colonies. It is pertinent to note that for at least four decades up to 1928, India had the second largest export surplus in the world (second only to the US). 

Neoliberal Globalization 

According to Prabhat Patnaik, the colonial mode of capital accumulation collapsed due to three reasons: “Domestic bourgeoisies in colonies wanted their own space; Japan emerged as a rival to Britain in Asian markets; the scope for investment in the ‘”new world” got exhausted with the “closing of the frontier”; and the scope for further de-industrialization in economies like India also began to get more and more limited. The Great depression of the 1930s was an expression of the fact that the old mechanism for stimulating buoyancy in capitalism could no longer function.” 

After the Great Depression, we had the Keynesian policy regime, characterized by countercyclical macroeconomic management by an interventionist, regulatory state committed to achieving full employment and higher incomes for everyone. Keynesianism entered into crisis in the 1970s with the onset of stagflation – high rates of inflation coinciding with high rates of unemployment. The crisis was intimately related to deepening problems of surplus capital absorption or over-accumulation in the developing monopoly-capitalist economy.

When neoliberal globalization was introduced in the post-Keynesian world, the strict segmentation of the world economy slowly came to an end. According to Prabhat Patnaik, “Even though labor from the South is still not free to move to the North, capital from the North is now far more willing than before to locate manufacturing and service-sector activities – the latter largely through outsourcing – in the South. This now makes real wages in the North subject to the baneful influence of the massive labor reserves of the South. Not that real wages in the United States or any other advanced country are anywhere near parity with Southern real wages. However, they tend to remain stagnant even as labor productivity increases in the North.” 

In other words, as long as the labor reserves of the  South last, not only will Third World wages remain abysmally low, but even metropolitan wages, while not exactly coming down to equal third world wages, will cease to increase as before because of competition from cheap Third World labour. In the foreseeable future, the labor army of the Global South will keep increasing as petty producers get economically dislocated due to the large-scale entry of multi-national corporations. These displaced petty producers will seek employment outside, which adds to the supply of the job-seeking work-force in the capitalist sector. But with meagre employment generation in the capitalist sector, these displaced petty producers only add to the relative size of the labour reserves. Considering this reality, it is entirely possible that wages in the Global North will keep stagnating.