Economic Lessons from Abroad: Workers, Wages, and Inequality

There are many varieties of capitalism, and, given our current travails, we in the U.S. are starting to realize that we may have a lot to learn from other ways of organizing the economy. 

By law, half of the board of directors at German companies are elected by the workers through a system of "works councils." This is a remarkable fact, and introduces all sorts of different incentives into corporate strategy (as compared to a narrow focus on shareholder value).

Adam Davidson, writing in the NY Times Magazine this week, notes the "beneficial constraints" the German system of worker/capital "co-determination" has on manufacturing there.  Similarly, Davidson shows how Harley Davidson has worked with his highly paid and skilled workers to turn around their failing production. He wonders if this would have been possible without experienced union workers.   

(I write about co-determination in my new book, and have blogged about VW's work's councils and their efforts to institute one at their new Chattanooga facility.)    

And it is not just our other OECD countries that have lessons--and cautionary tales--to offer. Levels of income inequality in the U.S. have over the last decades approached the level of developing countries. The Times today reports that middle class consumption is steadily eroding--from hotels to appliances to restaurants, the high-end and the low-end are growing at the expense of the middle. The Harley workers appear to be the exception. This may result in what Alain de Janvry, writing about developing countries, calls a "disarticulated economy," put simply, one in which workers cannot buy what they make, the opposite of the Fordist promise (to pay workers enough to afford the cars they make).       

Brazil in recent years has made great strides in re-articulating its economy, pulling millions into the middle class and stimulating domestic consumption. Perhaps, then, we should look to Brazil as well as to Germany for economic policy ideas.

Distribution of Value in Anglo-American and German Firms (based on Vitols 2004:371)

	Anglo-American (early 1990s)	Germany (early 1990s)	Germany (late 1990s)
labor	62.2%	85.3%	78.4%
credit	23.5%	5.4%	4.3%
government	14.3%	5.2%	6.8%
retained earnings	3.2%	5.2%	7.8%
dividends	15.0%	2.0%	2.8%

Wellbeing and Wages

Inequality has a huge impact on wellbeing, more so than even absolute income levels. A lot of what we feel about how we are doing, depends on how those around us are doing and our relative standing.
President Obama has been turning attention to inequality lately, and development measures have long taken it into account in terms of general economic wellbeing. And a number of recent studies from psychology, behavioral economics, and management not only help explain this, but point the way toward more optimal solutions:

Mat Richtel reports on recent research that suggests "a deeply rooted instinct to earn more than can possibly be consumed, even when this imbalance makes us unhappy" and that higher income levels may promote "mindless accumulation." In an experimental setting (and uses pieces of Dove chocolate as pay), researchers found that higher earners would work harder to accumulate more chocolate than they would be able to eat (during a limited period after the round of play), while low earners were content to work at a more relaxed pace. The pull of endless accumulation, it seems, can be so powerful as to overwhelm choices that might result in greater overall wellbeing.

Adam Davidson, in his excellent column in the NY Times Magazine argues that "paying [workers] and treating them better, will often yield happier customers, more engaged workers and--surprisingly--larger corporate profits." Citing research by Marshall Fisher (Wharton School) and Zeynep Ton (M.I.T.), he shows that good paying jobs are not only better for workers but also in many ways for the bottom line, to less turnover to more engagement.

Five One-Handed Economists, Paying German to Hold Your Money

Planet Money, consistently producing the best economics journalism around, have a couple of recent stories of interest.  (Hey, Adam Davidson: still waiting on you to broadcast the interview with me and Bob Frank that you recorded last year!):

Six policies economists love (and politicians hate),  including eliminating the mortgage deduction on personal income taxes and the health insurance deduction for companies, legalizing marijuana, introducing a carbon tax, and replacing income taxes with consumption taxes (the later two eloquently promoted by Bob Frank in The Darwin Economy). 

Investors pay Germany to hold their cash: as a sign of the topsy-turvy economic times in which we live, Germany's latest bond offering sold at a negative yield: investors are actually paying Germany to hold onto their money for them.  I wonder if I can get a deal like that from my bank.